External Commercial Borrowings (ECB) from the Foreign Equity Holders -Henceforth under Approval Route

RBI/2011-12/204-----A.P. (DIR Series) Circular No. 29--27th September 2011

As per the extant ECB policy, a ‘foreign equity holder’ to be eligible as ‘recognised lender’ under the automatic route would require minimum holding of paid-up equity in the borrower company as set out below:

(i) for ECB up to USD 5 million – minimum paid-up equity of 25 per cent held directly by the lender,

(ii) for ECB more than USD 5 million – minimum paid-up equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB does not exceeds four times the direct foreign equity holding).

2. To further rationalize the policy in this regard, the following clarifications are being issued:-

(i) Now onwards the term ‘debt’ in the debt-equity ratio will be replaced with ‘ECB liability’ and the ratio will be known as ‘ECB liability’-equity ratio to make the term signify true position as other borrowings/debt are not considered in working out this ratio;

(ii) The paid-up capital contributed by the foreign equity holder is considered under the extant guidelines for the purpose of calculation of equity for ECBs of or beyond USD 5 million from direct foreign equity holders. Henceforth, besides the paid-up capital, free reserves (including the share premium received in foreign currency) as per the latest audited balance sheet shall be reckoned for the purpose of calculating the equity of the foreign equity holder. Where there are more than one foreign equity holder in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned shall only be considered for calculating the ECB liability-equity ratio for reckoning quantum of permissible ECB.

(iii) For calculating the ECB liability, not only the proposed borrowing but also the outstanding ECB from the same foreign equity holder lender should be reckoned.

Further guidelines

4. To benefit eligible borrowers, it has been decided, in consultation with the Government of India, to consider the ECB proposals from foreign equity holders (direct/indirect) and group companies under the approval route as under:-

(i) Service sector units, in addition to those in hotels, hospitals and software, could also be considered as eligible borrowers if theloan is obtained from foreign equity holders. This would facilitate borrowing by training institutions, R &D, miscellaneous service companies, etc;

(ii) ECB from indirect equity holders may be considered provided the indirect equity holding by the lender in the Indian company is at least 51 per cent ; and

(iii) ECB from a group company may also be permitted provided both the borrower and the foreign lender are subsidiaries of the same parent.

3. While submitting these proposals, it may be ensured that total outstanding stock of ECBs (including the proposed ECBs) from a foreign equity lender does not exceed 7 times the equity holding, either directly or indirectly of the lender (in case of lending by a group company, equity holdings by the common parent would be reckoned).

4. All other aspects of the ECB policy, such as, maximum permissible limit per company per financial year under the automatic route, eligible borrower, end-use, all-in-cost ceiling, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged

External Commercial Borrowings (ECB) in Renminbi (RMB)- Under Approval Route

RBI/2011-12/205-A.P. (DIR Series) Circular No. 30- 30th September 2011

Attention of Authorized Dealer Category-I (AD Category-I) banks is invited to the Foreign Exchange Management (Borrowing or lending in foreign exchange) Regulations, 2000, notified vide Notification No. FEMA 3/2000-RB dated May 3, 2000, amended from time to time, the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000 notified vide Notification No. FEMA.14/2000-RB dated May 3, 2000, amended from time to time and the A.P. (DIR Series) Circular No. 5 dated August 1, 2005, amended from time to time relating to the External Commercial Borrowings (ECB).

2. Considering the specific needs of the infrastructure sector, the existing ECB policy has been reviewed in consultation with the Government of India and it has been decided to allow Indian companies which are in the infrastructure sector, where “infrastructure” is as defined under the extant guidelines on External Commercial Borrowings (ECB), to avail of ECBs in Renminbi (RMB), under the approval route, subject to an annual cap of USD one billion pending further review.

3. Once approved, the approval of the Reserve Bank will be valid for a period of three months from the date of issue of the approval letter and the loan agreement should be executed within the validity period. The company may thereafter submit the completed Form 83 to the Department of Statistics and Information Management (DSIM), Reserve Bank of India for allotment of loan registration number (LRN) within seven days (from the date of signing the loan agreement between the borrower and the lender). In case the borrower fails to obtain LRN within the above period, the approval of the Reserve Bank will stand cancelled.

4. AD Category- I bank will be permitted to open Nostro accounts in Renminbi (RMB). The designated AD – Category I bank shall monitor the end-use of funds and bank(s) in India will not be permitted to provide any form of guarantee(s). All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged and shall be complied with.

Unauthorised Overseas forex trading through electronic / internet trading portals- Offence under FEMA

RBI/2011-12/262----A.P. (DIR Series) Circular No. 46 dated 18 November 2011

Attention of the Authorised Dealer Category – I (AD Category – I) banks is invited to A.P. (DIR Series) Circular No. 53 dated April 07, 2011 wherein AD Category I banks were advised to exercise due caution and be extra vigilant in respect of the margin payments being made by the public for online forex trading transactions through credit cards / deposits in various accounts maintained with banks in India. Further, AD Category-I banks were also advised to exercise due caution in respect of the accounts being opened in the name of individuals or proprietary concerns at different bank branches for collecting the margin money, investment money, etc. in connection with such transactions.

2. It has been observed that overseas foreign exchange trading has been introduced on a number of internet /electronic trading portals luring the residents with offers of guaranteed high returns based on such forex trading. The advertisements by these internet / online portals exhort people to trade in forex by way of paying the initial investment amount in Indian Rupees.

Some companies have reportedly engaged agents who personally contact people to undertake forex trading/ investment schemes and entice them with promises of disproportionate / exorbitant returns. Most of the forex trading through these portals are done on a margining basis with huge leverage or on an investment basis, where the returns are based on forex trading.

The public is being asked to make the margin payments for such online forex trading transactions through credit cards / deposits in various accounts maintained with banks in India. It is also observed that accounts are being opened in the name of individuals or proprietary concerns at different bank branches for collecting the margin money, investment money, etc.

It is again reiterated that AD Category – I banks should exercise due caution and be extra vigilant in respect of the transactions that require residents to make margin payments for online forex trading transactions through credit cards / deposits in various accounts maintained with banks in India.

It is clarified that any person resident in India collecting and effecting / remitting such payments directly /indirectly outside India would make himself/ herself liable to be proceeded against with for contravention of the Foreign Exchange Management Act (FEMA), 1999 besides being liable for violation of regulations relating to Know Your Customer (KYC) norms / Anti Money Laundering (AML) standards.

Reporting of issue / transfer of Participat​ing interest/r​ight in Oil Fields to a Non Resident as an FDI Transactio​n

RBI through its A.P. (DIR Series) Circular No. 45 dated 16 November, 2011 notified the FEMA (Transfer of Issue of Security by a PersonResident outside India) Regulations, 2000.

In terms of the said regulations the transfer of equity shares / fullyand mandatorily convertible debentures/ fully and mandatorilyconvertible preference shares (hereinafter referred to as ‘shares’) of
an Indian company, from a person resident outside India (non-resident)to a person resident in India (resident) or vice versa, has to bereported to an AD Bank within 60 days of transactions.

Further, thereceipt of consideration for issue of shares as well as the issue of shares of an Indian company, to a non-resident has to be reported toRBI through an AD Bank within 30 days of the transaction.

Further it has decided, to treat the issue / transfer of‘participating interest/ rights’ in oil fields to a non- resident asForeign Direct Investment (FDI) transaction under the extant FDI policy and the FEMA regulations.

And these transactions have to be reported as FDI transactions in terms of the provisions of Regulations 9 and 10 of the Foreign Exchange Management (Transfer of Issue of Security by a Person
Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended.

Accordingly, transfer of ‘participating interest/ rights’ will be reported as ‘other’ category under Para 7 of revised Form FC-TRS as given in the Annex and issuance of ‘participating interest/ rights’
will be reported as ‘other’ category of instruments under Para 4 of Form FC-GPR.

ECB BY MICRO FINANCE INSTITUTIONS (MFIs) , NGO's and NBFC MIF's NOW UNDER AUTOMATIC ROUTE

 NOW , ECB CAN BE AVAILED BY MICRO FINANCE INSTITUTIONS (MFIs) , NGO's and NBFC MIF's NOW UNDER AUTOMATIC ROUTE !!!

(i)                  Eligible Borrower:

The following MFIs engaged in micro finance activities shall be considered as eligible borrowers to avail of ECBs:-

ü  MFIs registered under the Societies Registration Act, 1860;

ü  MFIs registered under Indian Trust Act, 1882;

ü  MFIs registered either under the conventional state-level cooperative acts, the national level multi-state cooperative legislation or under the new state-level mutually aided cooperative acts (MACS Act) and not being a co-operative bank;

ü  Non-Banking Financial Companies (NBFCs) categorized as ‘Non Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) and complying with the norms prescribed as per circular DNBS.CC.PD.No. 250/03.10.01/2011-12 dated December 02, 2011; Further, under the extant FDI policy, ‘leasing and finance’ is one of the 18 NBFC activities wherein FDI up to 100 per cent is permitted under automatic route, subject to minimum capitalisation norms. It is hereby clarified that FDI is permitted only in ‘financial leases’ (financial leasing activity) and not in ’operating leases’ (operating leasing activity). ( RefRBI/2011-12/542
 A. P. (DIR Series) Circular No.121dated 8 May 2012) and

ü  Companies registered under Section 25 of the Companies Act, 1956 and involved in micro finance activity.

(ii) Borrowing relationship and fit and proper status:

Further, the MFIs registered as societies, trusts and co-operatives and engaged in micro finance

• should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange; and

• would require a certificate of due diligence on `fit and proper’ status of the Board/Committee of Management of the borrowing entity from the designated Authorized Dealer (AD) bank.

(iii) Recognized lenders

ECB funds should be routed through normal banking channels. NBFC-MFIs will be permitted to avail of ECBs from multilateral institutions, such as IFC, ADB etc./ regional financial institutions/international banks / foreign equity holders and overseas organizations.

Companies registered under Section 25 of the Companies Act and engaged in micro finance will be permitted to avail of ECBs from international banks, multilateral financial institutions, export credit agencies, foreign equity holders, overseas organizations and individuals.

Other MFIs will be permitted to avail of ECBs from international banks, multilateral financial institutions, export credit agencies, overseas organizations and individuals. Overseas organizations and individuals complying with following safeguards may lend ECB

a) Overseas organisations planning to extend ECB would have to furnish a certificate of due diligence from an overseas bank which in turn is subject to regulation of host-country regulator and adheres to Financial Action Task Force (FATF) guidelines to the designated AD. The certificate of due diligence should comprise the following (i) that the lender maintains an account with the bank for at least a period of two years, (ii) that the lending entity is organized as per the local law and held in good esteem by the business/local community and (iii) that there is no criminal action pending against it.

b) Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents, such as audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not permitted to extend ECB.

(iv) Permitted End-use: The designated AD must ensure that the ECB proceeds are utilised for lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building.

.(v) Amount of ECB : With a view to ensure minimization of systemic risk, the maximum amount of foreign currency borrowings of a borrower is capped at USD 10 million during a financial year.

3. It has also been decided that Non-Government Organisations (NGOs) engaged in micro finance activities can avail of ECB up to USD 10 million or equivalent per financial year under the automatic route as against the present limit of USD 5 million or equivalent per financial year. All other conditions as detailed in our A.P. (DIR Series) Circular No. 40 dated April 25, 2005 remain unchanged.

4. Other ECB Parameters :

All other ECB parameters such as minimum average maturity, all-in-cost ceilings, restrictions on issuance of guarantee, choice of security, parking of ECB proceeds, prepayment, refinancing of ECB, reporting arrangements under the Automatic Route should be complied with by MFIs/NGOs availing ECBs. The designated AD has to certify the status of the borrower as eligible and involved in micro finance and ensure at the time of draw down that the forex exposure of the borrower is fully hedged.

Compounding of Offences under FEMA -Delay in reporting to RBI - Now delegated to the Regional RBI

In a welcome step, RBI has now delegated powers to Regional Offices of RBI to condone the delay in respect of filing , reportin and issues shares under FDI .

In order to facilitate the operational convenience, RBI vide its APDIR Circular No.57 dated December 13, 2011 decided to delegate the powers to the Regional Offices of the Reserve Bank of India to compound the contraventions of FEMA involving;

· delay in reporting of inward remittance
· delay in filing of form FC-GPR after allotment of shares and 
· delay in issue of shares beyond 180 days

All other applications (for violations of substantial provisions, ECB norms, etc) may be submitted to the Compounding Authority, Cell for Effective implementation of FEMA (CEFA), Foreign Exchange Department, The Reserve Bank of India, Mumbai.

Further, under the existing process there is no uniformity in submitting the required details with supporting documents along with the compounding application. This results in avoidable correspondence between Reserve Bank and the applicant. To avoid this kind of delay, now RBI has prescribed the information and documents need to be submitted along with application.

This move will help the Company to save considerable cost and time in the compounding process.

Reporting of issue / transfer of Participat​ing interest/r​ight in Oil Fields to a Non Resident as an FDI Transactio​n

RBI through its A.P. (DIR Series) Circular No. 45 dated 16 November 2011 notified the FEMA (Transfer of Issue of Security by a PersonResident outside India) Regulations, 2000.

In terms of the said regulations the transfer of equity shares / fully and mandatorily convertible debentures/ fully and mandatorily convertible preference shares (hereinafter referred to as ‘shares’) of
an Indian company, from a person resident outside India (non-resident) to a person resident in India (resident) or vice versa, has to be reported to an AD Bank within 60 days of transactions. Further, the
receipt of consideration for issue of shares as well as the issue of shares of an Indian company, to a non-resident has to be reported to RBI through an AD Bank within 30 days of the transaction.

Further it has decided, to treat the issue / transfer of ‘participating interest/ rights’ in oil fields to a non- resident as Foreign Direct Investment (FDI) transaction under the extant FDI policy and the FEMA regulations.

And these transactions have to be reported as FDI transactions interms of the provisions of Regulations 9 and 10 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended.
Accordingly, transfer of ‘participating interest/ rights’ will be reported as ‘other’ category under Para 7 of revised Form FC-TRS and issuance of ‘participating interest/ rights’ will be reported as ‘other’ category of instruments under Para 4 of Form FC-GPR.

Set-off of export receivable​s against import payables-L​iberalizat​ion of Procedure

 RBI has delegate power to AD Category – I banks to deal with the cases of “set-off” of export receivables against import payables, subject to following terms and conditions:

 

a.The import is as per the Foreign Trade Policy in force.

b.Invoices/Bills of Lading/Airway Bills and Exchange Control copies of Bills of Entry for home consumption have been submitted by the importer to the Authorized Dealer bank.

c.Payment for the import is still outstanding in the books of the importer.

d.Both the transactions of sale and purchase may be reported separately in ‘R’ Returns.

e.The relative GR forms will be released by the AD bank only after the entire export proceeds are adjusted / received.

f.The ” set-off” of export receivables against import payments should be in respect of the same overseas buyer and supplier and that consent for ”set-off” has been obtained from him.

g.The export / import transactions with ACU countries should be kept outside the arrangement.

h.All the relevant documents are submitted to the concerned AD bank who should comply with all the regulatory requirements relating to the transactions.

 

Ref: A.P. (DIR Series) Circular No. 47 dated November 17, 2011.

Guarantee by an Indian company on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs) abroad.

Guarantee by Indian Company on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs) abroad.

 i. Presently, only promoter corporates are permitted to offer guarantees on behalf of their Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs), under the Automatic Route and issue of personal, collateral and third party guarantees requires prior approval of Reserve Bank and is considered by RBI, on a case by case basis.

 ii. The scope of guarantees covered under the Automatic Route has been enlarged. Indian entities are now permitted to offer any forms of guarantee – corporate or personal/ primary or collateral/ guarantee by the promoter company/ guarantee by group company, sister concern or associate company in India, provided:

 a) All "financial commitments" including all forms of guarantees are within the overall prescribed ceiling for overseas investment of the Indian party i.e. currently within 400 per cent of the net worth of the investing company (Indian party).

 b) No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront, and

 c) As in the case of corporate guarantees, all guarantees are required to be reported to RBI in form ODI..
 iii. Guarantees issued by banks in India in favour of WOS/ JVs outside India are outside this ceiling and would be subject to prudential norms issued by RBI from time to time.

Financial commitment means the amount of direct investment outside India by way of contribution to equity, loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas JV/WOS ( the amount and period of the guarantee should be specified upfront).

Loan and guarantee can be extended to an overseas entity only if there is already existing equity participation by way of direct investment, within the overall ceiling of 400% of the Indian party's net worth as on the date of the last audited balance sheet. 

 Direct investment through the medium of a SPV is permitted under the Automatic Route, for the sole purpose of investment in JV/WOS overseas. Where the JV/WOS has been established through a SPV, all funding to the operating subsidiary should be routed through the SPV only. However, in the case of guarantees to be given to the first–level step down subsidiary of the SPV, these can be given directly by the Indian Party provided such exposures are within the permissible financial commitment of the Indian Party.

A Indian parent company can extend guarantee through Indian bank outside India under automatic route but it should be within 100% networth limit.

No prior approval is necessary as long as if they adhere above.

You have to report to RBI through for ODI for the guarantees issued.

For any doubt or clarification , you may please contact at rvsekar2007@gmail.com or 09848915177.

FDI in existing pharmaceutical companies needs prior approval from Government

1. Present Position:

Foreign Direct Investment (FDI), up to 100%, under the automatic route, is permitted in the pharmaceuticals sector.

2. Revised Position:

The Government of India has reviewed the extant policy on FDI and decided as under:

(i) FDI, up to 100%, under the automatic route, would continue to be permitted for greenfield investments in the pharmaceuticals sector.

(ii) FDI, up to 100%, would be permitted for brownfield investments (i.e., investments in existing companies), in the pharmaceuticals sector, under the Government approval route.

3. Accordingly, the following amendment is made in 'Circular 2 of 2011- Consolidated FDI Policy', dated 30-9-2011, issued by the Department of Industrial Policy & Promotion:

Insertion of a new paragraph 6.2.25:

A new paragraph (6.2.25) is inserted as below :

6.2.25	Pharmaceuticals
6.2.25.1	Greenfield	100%	Automatic
6.2.25.2	Existing companies	100%	Government

4. The above decision will take immediate effect. It would be reviewed after a period of six months.

 

Ref: Note No.3 (2011 Series), dated 8-11-2011

If u have any further clarification or question , please contract through rvsekar2007@gmail.com or
09848915177.

Liberalisation of transfer of shares between resident and non-resident

Reserve Bank said that transfer of shares between Indians and non-residentswill not require its permission in several key areas like financial services.  Amending theForeign Exchange Management Regulations, the RBI said that its prior permission would not be necessary where the company whose shares are being transferred is engaged in any financial service. Besides, the RBI permission has also been done away with for transfer of shares between residents and non-residents in cases where the Foreign Investment Approval Board ( FIPB) has already given its clearances and the SEBI guidelines have been adhered to. These steps have been taken “as a measure to further liberalise and rationalise the procedures and policies governing foreign directinvestment in India,” . However, it was made clear that the transactions will have to comply with the SEBI regulations, FDI sectoral caps, and the pricing guidelines asspecified by RBI.

Transfer of shares from a Non Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met provided that

i. The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation, etc.;

ii. The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST, buy back); and

iii. Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

B. Transfer of shares from Resident to Non Resident :

i) where the transfer of shares requires the prior approval of the FIPB

as per the extant FDI policy provided that :

a) the requisite approval of the FIPB has been obtained; and

b) the transfer of share adheres with the pricing guidelines and documentation requirements as specified by the Reserve Bank of India from time to time.

ii) where SEBI (SAST) guidelines are attracted

subject to the adherence with the pricing guidelines and documentation requirements as specified by Reserve Bank of India from time to time.

iii) where the pricing guidelines under the Foreign Exchange Management Act (FEMA), 1999 are not met provided that

a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc.; 3

b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST); and

c) Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

iv) where the investee company is in the financial sector provided that :

a) NOCs are obtained from the respective financial sector regulators/ regulators of the investee company as well as transferor and transferee entities and such NOCs are filed along with the form FC-TRS with the AD bank; and

b). The FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc., are complied with.

RBI Circular reference -- A.P. (DIR Series) Circular No. 43 November 04, 2011

For any doubts or clarficiation , please contact me in rvsekar2007@gmail.com or 09848915177,

INVESTMENT BY OCB's ( Overseas Body Corporate) IS ALLOWED NOW UNDER FEMA?

As per FEMA regulation, OCB is not now allowed to invest in either in primary or secondary markets as of date.

Overseas Corporate Bodies (OCBs) have been de-recognised as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India which has made investment in India earlier and are not under adverse notice of the Reserve Bank can make fresh investments under the FDI Scheme as incorporated non-resident entities, with the prior approval of the Government of India, if the investment is through the Government Route; and with the prior approval of the Reserve Bank, if the investment is through the Automatic Route. However, before making any fresh FDI under the FDI scheme an erstwhile OCB should through their AD bank take a one time certification from RBI that it is not in the adverse list being maintained with the Reserve Bank of India.

ADs should also ensure that OCBs do not maintain any account other than NRO current account in line with the instructions as per A.P. (DIR Series) Circular No. 14 dated September 16, 2003. Further, this NRO account should not be used for any fresh investments in India. Any fresh request for opening of NRO current account for liquidating previous investment held on non-repatriation basis should be forwarded by the AD bank to Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. However, ADs should not close other category of accounts (NRE / FCNR / NRO) for OCBs which are in the adverse list of the Reserve Bank of India. These accounts are to be maintained by the respective AD banks in the frozen status.

Some Important Amendments in Foreign Direct Investment Scheme by RBI under FEMA

     Some Important Amendments in Foreign Direct Investment Scheme by RBI under FEMA.

Opening of non-interest bearing account by non-resident.

Authorized dealerpermitted to opening and maintaining non-interest bearing Escrow accounts inIndian Rupees in India under automatic route, on behalf of non-residents,towards payment of share purchase consideration and/or for keeping securitiesto facilitate FDI transactions, subject to the terms and conditions as specifiedby RBI.

       FDI  with built in option like selling to third parties or buy-back will not be considered as FDI

As we aware  as per existingFDI Policy, only issuance of equity shares, fully, compulsorily and mandatorilyconvertible debentures and fully, compulsorily and mandatorily convertiblepreference shares will be considered for FDI.

 Typically any foreign / domestic investmentwill have an exit option for the investor. Normally after 3 to 5 years from the date of investment, the investor exit from the Company either through IPO / buyback by the promoters / selling to third party.

 Now, vide Master Circular No.2 of 2011 DIPPsays that any of above said instruments with  in-built options of any type (i.e exit by wayof buy back or selling to third party) will not be considered as FDI and itwill treated as ECB and subject to compliance with ECB Policy.

 FDIin single brand retail

 As per existing provisions, FDI in singlebrand retail is allowed upto 51% subject to the approval from FIPB and otherconditions as imposed under FDI Policy.

 Vide this Master Circular No.2 of 2011 DIPP has imposed an additional condition that “theforeign investor should be the owner of brand”. Hence, only foreign investorwho owns brand can enter into single brand retail segment in India.


Inclusion of ‘basic and applied R&D onbio-technology pharmaceutical sciences/life sciences’, as an ‘industrial activity’, under the category of industrial parks.

As per existing Policy, 100% FDI ispermitted under the automatic route in existing and new industrial parks. Underthe existing regime, industrial parks cover specified sectors. In order to encourage development ofinfrastructure for R & D, Research and Development inbio-technology, pharmaceutical and life sciences included under the category ofindustrial park.

 Exemption of construction-developmentactivities in the education sector and in old-age homes, from the generalconditions as imposed under FDI Policy.

 As per exiting policy, 100% FDI is permitted  in construction development underthe automatic route subject to conditions like minimum build up area, minimumcapital requirement, lock-in period, etc.
 Vide Master 2 of 2011 DIPP clarified that theconditions imposed for construction development activities shall not be applicablefor construction in the education sector like construction of schools, college,university, etc and in respect of old-age homes. Hence, the constructiondevelopment companies can utilize this effectively to get more FDI without any conditionality.


Introduction of provisionson ‘pledging of shares’ and opening of non-interest bearing escrow accounts, subjectto specified conditions.

The promoters of an Indian can pledge shared held n that Company or that of its associate resident companies for the purpose of securing the ECBraised by the Company subject to NOC from authorized dealer bank and otherconditions as stipulated in FDI Policy.

 Increasing FDI Limit inTerrestrial Broadcasting/ FM radio.

 The foreign investmentlimit for FM radio has been enhanced to 26% from the earlier 20%. This changeensures conformity of the foreign investment limit in this sector with othersimilar activities in the Information & Broadcasting sector.

 Liberalisation ofconversion of imported capital goods/machinery andpre-operative/pre-incorporation expenses to equity instruments.

 Conversion of importedcapital goods/machinery and pre-operative/pre-incorporation expenses to equityinstruments had been permitted in the last Circular on FDI policy, effective 1April, 2011. It was stipulated that such conversions must be made within aperiod of 180 days of the date of shipment of capital goods/machinery orretention of advance against equity and that payments made through thirdparties would not be allowed. This conveyed the sense that the onus of  conversion is on the investor with no allowance for the FIPB process involved.This has been clarified through the present amendment, under which the timelimit for making applications for such conversions will be 180 days.

Further,payments for pre-operative/incorporation expenses can now be made directly bythe foreign investor to the company or through a bank account, opened by theforeign investor, as provided under the FEMA regulations.


REF ; FDI Circular 02 / 2011 - Consolidated FDI Policy

IS INVESTMENT IN GDRS IS REALLY PAY OFF ADEQUATE RETURNS TO INVESTORS?

A GDR is an instrument that is listed on an exchange outside the home country of the issuer and denotes a fixed number of a company's shares as the underlying product. Once listed, it can also be converted into equity shares of the issuing company.

GDR investment in consumer durables, Information technology and media companies were major underperformers.

 A study has revealed that investors have lost money in 85 per cent of such issues abroad..Last week , the Securities and Exchange Board of India (Sebi) banned seven companies and some entities for manipulating share prices using global depository receipts (GDRs),

According to  the CRISIL study "An analysis of 40 GDRs issued by Indian companies in 2010 reveals that investors have lost money in 85 per cent, with four out of five issues giving a negative return of 35 per cent or more,".

 As on September 15, the average return on investments (a measurement of the difference in the offer price and the market price) by all the GDRs issued in 2010 was a negative 52 per cent, it added

According to CRISIL, Interestingly, Indian companies have been the most active GDR issuers, accounting for nearly 68 per cent of all listed GDRs on the Luxembourg Stock Exchange as of December 2010. During 2010, Indian companies, predominantly small and mid-cap ones, raised around $1.2 billion through the GDR route in the year 2010 alone.

According to CRISIL, during 2010, many Indian companies were able to attract foreign investors through the GDR route, given the performance of equity markets and the strong domestic growth rate of a little over eight per cent. Further, lower disclosure norms on end-use of funds make fund raising through GDRs easier for domestic companies,”

Teledata Technology Solutions' GDR is the worst performer, with its price on September 15 trading 93 per cent below the offer price.

Other entities that have seen the price erode significantly include Ashco Niulab Industries (down 81 per cent), BAG Films and Media (down 73 per cent), Birla Power Solutions (down 74 per cent), Cox and Kings (down 25 per cent), Shree Ashtavinayak Cine Vision (down 51 per cent), Nissan Copper (down 45 per cent) and FCS Software Solutions (down 83 per cent).

On the other hand, Rainbow Papers' issue has been the best performer, with its price trading 148 per cent higher than the offer price.

According to CRISIL, meanwhile, the number of GDRs issued in 2011 has slowed. Only 12 Indian companies have raised money, a total of $0.2 bn through GDRs during 2011, as compared to 34 companies that raised $1 bn during the corresponding period in 2010. "Volatility and weak performance of Indian equity markets in 2011 have damped investor sentiments. This, coupled with the weak performance of the past GDRs, has made them less attractive to foreign investors.

Source : Business Standard 28th September 2011

FURTHER LIBERALIZATION OF ECB NORMS - ECB UPTO USD 750 Million under Automatic Route

Enhancement of ECB limit under the automatic route

(a) Eligible borrowers in real sector-industrial sector-infrastructure sector can avail of ECB up to USD 750 million or equivalent per financial year under the automatic route as against the present limit of USD 500 million or equivalent per financial year.

(b) Corporates in specified service sectors viz. hotel, hospital and software, can avail of ECB up to USD 200 million or equivalent during a financial year as against the present limit of USD 100 million or equivalent per financial year subject to the condition that the proceeds of the ECBs should not be used for acquisition of land.

(ii) ECBs designated in INR

(a) 'All eligible borrowers' can avail of ECBs designated in INR from foreign equity holders under the automatic/ approval route, as the case may be, as per the extant ECB guidelines.

(b) NGOs engaged in micro finance activities will, however, be permitted to avail of ECBs designated in INR, as hitherto, under the automatic route from overseas organizations and individuals as per the extant guidelines.

(iii) ECB for Interest During Construction (IDC)

It has been decided to consider IDC as a permissible end-use for the Indian companies which are in the infrastructure sector, where “infrastructure” is defined in terms of the extant guidelines on External Commercial Borrowings (ECB) under the automatic/approval route, as the case may be, subject to the following conditions:-

(a) that the IDC is capitalized; and

(b) is part of the project cost.

Ref: RBI/2011-12/201/A.P. (DIR Series) Circular No.27/ 23 September 2011

3. All other aspects of the ECB policy such as eligible borrower, recognised lender, all-in-cost, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged

BRIDGE FINANCE UNDER ECB NOW CAN BE AVAILED BY INFRASTRUCTURE COMPANIES

Considering the specific needs of the infrastructure sector, the existing ECB policy has been reviewed in consultation with the Government of India and it has been decided to allow Indian companies which are in the infrastructure sector, where “infrastructure” is as defined under the extant guidelines on External Commercial Borrowings (ECB), to import capital goods by availing of short term credit (including buyers’ / suppliers’ credit) in the nature of 'bridge finance', under the approval route, subject to the following conditions:-

(i) the bridge finance shall be replaced with a long term ECB;

(ii) the long term ECB shall comply with all the extant ECB norms; and

(iii) prior approval shall be sought from the Reserve Bank for replacing the bridge finance with a long term ECB.

3. The designated AD - Category I bank shall monitor the end-use of funds and banks in India will not be permitted to provide any form of guarantees. The designated AD - Category I bank shall evidence the import of capital goods by verifying the Bill of Entry. All other conditions of ECB, such as eligible borrower, recognized lender, all- in-cost, average maturity, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged and should be complied with.

Ref: RBI/2011-12/200---A.P. (DIRSeries) Circular No. 26 dated 23 Sep 2011

Now INFRASTRUCTURE COMPANY CAN REPAY PART OF THE RUPEE LOAN THROUGH FRESH ECB

As per extant guidelines, repayment of existing Rupee loans is not a permissible end-use for ECB. Considering the specific needs of the infrastructure sector, the existing ECB policy has been reviewed in consultation with the Government of India and it has been decided to allow Indian companies which are in the infrastructure sector, where “infrastructure” is as defined under the extant guidelines on External Commercial Borrowings (ECB), to utilise 25 per cent of the fresh ECB raised by the corporate towards refinancing of the Rupee loan/s availed by them from the domestic banking system, under the approval route, subject to the following conditions:-

 

(i) at least 75 per cent of the fresh ECB proposed to be raised should be utilised for capital expenditure towards a 'new infrastructure' project(s), where “infrastructure” is as defined in terms of the extant guidelines on ECB.

(ii) in respect of remaining 25 per cent, the refinance shall only be utilized for repayment of the Rupee loan availed of for 'capital expenditure' of earlier completed infrastructure project(s); and

(iii) the refinance shall be utilized only for the Rupee loans which are outstanding in the books of the financing bank concerned.

3. Companies desirous of availing such ECBs may submit their applications in Form ECB through their designated Authorised Dealer bank with the following documents:

(i) details of the project(s) completed with necessary certification from the designated AD Category I bank;

(ii) certification from the Statutory Auditor regarding the utilization of Rupee term loans with respect to 'capital expenditure'; for the completed infrastructure project(s), duly certified by the domestic lender bank(s) concerned;

(iii) certification from the designated Authorised Dealer bank about the outstanding Rupee loans ; and

(iv) details of the proposed end-use of the new infrastructure project.

4. The designated AD - Category I bank shall monitor the end-use of funds and bank(s) in India will not be permitted to provide any form of guarantee(s). All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged and shall be complied with.

 

 

 

 

 

 

 

Ref

 

 

 

 

RBI Circular RBI/2011-12/199--A.P. (DIR Series) Circular No. 25 dated September 23, 2011

Whether investment in new companies in abroad can be made by Indian resident under Liberalised Remittance Scheme?

RBI master circular does not prohibit to invest in the shares of new companies.


Under the scheme, resident individuals can acquire and hold immovable property or shares (listed or otherwise) or debt instruments or any other assets outside India, without prior approval of the Reserve Bank. The word otherwise can be interpreted as any other non-listed , new company etc,

Further , the RBI circular notifies the investment in shares as

S0001
Indian investment abroad in equity capital (shares)

It does not specifically state not in the shares of new companies in abroad

Hence , according to me , there is no bar in investing in new company shares in abroad under LRS Scheme up to $ 75000 per FY.

What foreign financial assistance will come under ECB and what not ?

Modes of raising ECBs

ECB constitutes the foreign currency loans raised by residents from recognised lender. The ambit of ECB is wide. It recognizes simple form of credit as suppliers’ credit as well as sophisticated financial products as securitization instruments.

Basically ECB suggests any kind of funding other than Equity (considered foreign direct investment) be it Bonds, Credit notes, Asset Backed Securities, Mortgage Backed Securities or anything of that nature, satisfying the norms of the ECB regulations.

The different borrowings and loans that come under the ECB roof are:

1. Commercial Bank Loans: These loans constitute the term loans taken by companies from banks outside India.

2.Buyer’s Credit: Buyer’s credit is the credit availed by the importers of goods/services from overseas lenders such as Banks and Financial Institutions for payment of their Imports on the due date. This lending is usually based on the letter of Credit (a Bank Guarantee) issued by the importer’s bank, i.e., the importer’s bank acts as a broker between the Importer and the Overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee.

1. Supplier’s Credit

Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate Bonds (FRBs) , Syndicated Loans etc.

4.Credit from official export credit agencies
Commercial borrowings from the private sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC,

5.Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognized credit rating agency.
6.Lines of Credit from foreign banks and financial institutions
7.Financial Leases
8.Import Loans

9.Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

10.External assistance, NRI deposits, short-term credit and Rupee debt

11.Foreign Currency Convertible Bonds

12.Non convertible or optionally convertible or partially convertible debentures

What is not included under ECBs

1.Investment made towards core capital of an organization viz.

a)Investment in equity shares

b)Convertible preference shares

c)Convertible debentures

d)Instruments which are fully and mandatorily convertible into equity within a specified time are to be reckoned as part of equity under the FDI Policy

e)Equity capital

f)Retained earnings of FDI companies

g)Other direct capital (inter-corporate debt transactions between related entities)

PROCEDURES FOR AVAILING ECB -EXTERNAL COMMERCIAL BORROWINGS

Before availing ECB , the borrower in India have to obtain LRN ( Loan Registration number ) from RBI under automatic route .

The procedure for obtaining LRN number is as follows:

For allotment of Loan Registration Number (LRN), borrowers are required to submit Form 83, in duplicate, certified by the Company Secretary (CS) or Chartered Accountant (CA) to the designated AD bank. One copy is to be forwarded by the designated AD bank to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Systems (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051.

(c) The borrower can draw-down the loan only after obtaining the LRN from DSIM, Reserve Bank.

(d) Borrowers are required to submit ECB-2 Return certified by the designated AD bank on monthly basis so as to reach DSIM, Reserve Bank within seven working days from the close of month to which it relates.

Please note that  previous returns relating to ECB viz. ECB 3 – ECB 6 have been discontinued with effect from January 31, 2004.


Under automatic approval route , the following futher procedures have to be adhered :

* Board Resolution towards the ECB application.

* Loan Agreement to be entered with Recognized Lender.

* Documents related to application of LRN (Loan Registration Number) by filing Form 83 in duplicate duly certified by any Practicing Professional

*  The Certificate of Due Diligence to be submitted by the Overseas Organizations  / Individual Lender to AD Bank of Indian company (Borrower)

* Form 83 duly filled

* No Objection by AD Category I bank in case of creation of charge on immovable property if any.

* ECB Return - 2 on monthly basis once ECB is availed.

Liberalization in Operations of NRE, FCNR(B), EEFC and RFC Account Jointly by close relative of a non resident

It is to be noted that joint operation of resident account with NRI, NRE, FCNR(B), EEFC and RFC account is not permitted as per existing provisions of FEMA.
However , RBI has come with liberalisation of RFC / EEFC accounts may be permitted to be held jointly with a resident close relative, as defined in Section 6 of the Companies Act, 1956.

On a review, it has been decided that resident individuals may be permitted to include resident close relative(s) as defined in the Companies Act, 1956 as a joint holder(s) in their EEFC/RFC bank accounts on ‘former or survivor’ basis. However, suchresident Indian close relative, now being made eligible to become joint account holder, shall not be eligible to operate the account during the life time of the resident account holder.

As part of linearization and develop operational convenient especially after demise of first holder, the following amendments has been made with regard joint operations;

Resident SB Account: Pursuant to this amendment, individual resident in India is permitted to include non-resident close relative(s) as joint holder in the resident Savings bank account on ‘former or survivor’ basis. 

NRE / FCNR(B) Account: Non-Resident Indian (NRI) is permitted to open NRE / FCNR (B) with their resident close relatives on ‘former or survivor’ basis.

EEFC / RFC Account: Individual resident in India is permitted to include resident close relative(s) as joint holders in their EEFC / RFC account on ‘former or survivor’ basis.

It is to be observed that in case of NRE / FCNR (B) Account, the resident close relative shall be eligible to operate the account as a Power of Attorney holder during the life time of the NRI/ PIO account holder.

Ref: RBI/2011-12/176A.P. (DIR Series) Circular No. 15 dated 15 September 2011

Residents can now meet the medical expenses of his NRI relatives in India

As per existing guidelines , a resident may make payment in rupees towards meeting expenses on account of boarding, lodging and services related thereto or travel to and from and within India of a person resident outside India who is on a visit to India.

 Now, it has been decided by RBI that where the medical expenses in respect of NRI close relative (relative as defined in Section 6 of the Companies Act, 1956) are paid by a resident individual, such a payment being in the nature of a resident to resident transaction may be covered under the term “services related thereto” under Regulation 2(i) of Notification No. FEMA 16 /2000- RB dated May 3, 2000, ibid.

Thus , now , a resident under automatic route , can meet the medical expenses of his close NRI relatives .

Ref:
RBI/2011-12/184---A.P. (DIR Series) Circular No. 20 dated 16th September 2011

Repayment of Housing Loan avaialed by an NRI by Close relative of such NRI in Indian Rupees- Now Allowed under automatic route

The housing loan provided to a non-resident Indian or a person of Indian origin resident outside India by an authorised dealer or a housing finance institution in India approved by the National Housing Bank for acquisition of a residential accommodation in India, may be repaid by any relative of the borrower in India by crediting the borrower's loan account through the bank account of such relative (relative as defined in section 6 of the Companies Act, 1956). Thus, repayment of loan by close relative in respect of loan in rupees availed by NRI is restricted to housing loans only.

Such housing  loans availed by NRI  may also be repaid by resident close relative (relative as defined in Section 6 of the Companies Act, 1956), of the Non-Resident Indian by crediting the borrower's loan account through the bank account of such relative.

The Reserve Bank of India has allowed resident individuals torepay housing loans in rupee on behalf of their close relatives, whoare non-resident Indians (NRIs) or People of Indian origin (PIO).
"..It has been decided that where an authorised dealer (bank) in Indiahas granted loan to a non-resident Indian..., such loans may also berepaid by resident close relative of the NRI by crediting the
borrower's loan account through the bank account of such relative,"

However, this repayment facility is restricted to housing loan only,

Ref:RBI/2011-12/183  A.P. (DIR Series) Circular No. 19 dated 16 September 2011

Loans in Rupees by resident individuals to NRI close relatives under Automatic Route

Now , RBI has granted general permission to lend in Rupees to their non-resident close relative (means relative as defined in Section 6 of the Companies Act, 1956) for any personal purpose or business activities other than agricultural/plantation activities or real estate or relending business.

Now , it has been decided to permit a resident individual to lend to a Non resident Indian (NRI)/ Person of Indian Origin (PIO) close relative [means relative as defined in Section 6 of the Companies Act, 1956] by way of crossed cheque /electronic transfer, subject to the following conditions:

the loan is free of interest and the minimum maturity of the loan is one year;
(ii) the loan amount should be within the overall limit under the Liberalised Remittance Scheme of USD 75,000 per financial year available for a resident individual. It would be the responsibility of the lender to ensure that the amount of loan is within the Liberalised Remittance Scheme limit of USD 200,000 during the financial year;

(iii) the loan shall be utilised for meeting the borrower's personal requirements or for his own business purposes in India;

(iv) the loan shall not be utilised, either singly or in association with other person, for any of the activities in which investment by persons resident outside India is prohibited, namely;

(a) the business of chit fund, or
(b) Nidhi Company, or
(c) agricultural or plantation activities or in real estate business, or construction of farm houses, or
(d) trading in Transferable Development Rights (TDRs).

Explanation: For the purpose of item (c) above, real estate business shall not include development of townships, construction of residential / commercial premises, roads or bridges.

(v) The loan amount should be credited to the NRO a/c of the NRI /PIO. Credit of such loan amount may be treated as an eligible credit to NRO a/c;

(vi) the loan amount shall not be remitted outside India; and

(vii) repayment of loan shall be made by way of inward remittances through normal banking channels or by debit to the Non-resident Ordinary (NRO) / Non-resident External (NRE) / Foreign Currency Non-resident (FCNR) account of the borrower or out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

RBI/2011-12/180- A.P. (DIR Series) Circular No. 18 dated 16 September 2011

Transfer of security by way of gift – Increase of Limit per Financial Year

Vide A.P. (DIR Series) Circular No. 08 dated August 25, 2005 in terms of which a person resident in India who proposes to transfer any security, by way of gift, to a person resident outside India, is required to make an application to the Reserve Bank.

Hitherto, a person resident in India who proposes to transfer, by way of gift, to a person resident outside India any security including shares/convertible debentures is required to obtain prior approval of the Reserve Bank. However, the value of security to be transferred together with any security transferred by the transferor, as gift, to any person residing outside India which was not to exceed the rupee equivalent of USD 25,000 during a calendar year has been enhanced to USD 50,000 per financial year.

This is as per RBI/2011-12/175 A.P. (DIR Series) Circular No. 14 dated 15 September 2011

ALL ABOUT EXTERNAL COMMERCIAL BORROWINGS ( ECBs)

This research article has been published in the 36th Regional Conference of The Institute of Company Secretaries of India  held on 19-20 August 2011 at Chennai

As the current lending rates of Indian banks are hovering around 15%, by resorting to external commercial borrowings, CFOs of large Indian companies are trying to minimise the finance charges in their P&L account. Thus, CFOs are resorting to ECB as one of the financial engineering strategies to maximise the profitability of the company. However, heavy reliance on ECB can be a landmine to a company if there is a high volatile exchange rate fluctuation. Thus, by resorting to new financial instruments like hedging the forex exposures, CFOs of large companies are trying to pool in the international funds in Indian markets at a lower cost so that they could remain as profit making and as a competitive company.  This research essay gives you a vista and comprehensive picture of current ECB regulations in India and how the companies are benefiting out of it.

ECB as A Strategy of Long-term Funding for the Large Indian Companies

Eligible Indian borrowers are now permitted to avail commercial loans which are known as External Commercial Borrowings (ECB) with a minimum average maturity period of 3 years from eligible recognised non-resident lenders. ECB can take the following forms; loan from banks, supplier’s credit, buyer’s credit, securitised instruments and debt instruments.

There are two routes for raising ECB; one is automatic route where no prior approval is needed from RBI subject to adherence with the reporting needs immediately after availing the ECB and another one is under approval route.

Restrictions on Use of ECB’s

v  For investment in real estate sector; however, companies engaged in construction of “integrated township” is now allowed to avail ECB under approval route.

v  As per RBI Master Circular 2011, for repayment of existing Rupee loans, working capital, and general corporate purpose. However, under approval rate, RBI allows this as a special case. For instance, under approval route, RBI has permitted M/s Tata Teleservices Ltd and IDEA Cellular Ltd to refinance their INR Loan 3-G Spectrum-fee.  In May 2011 alone, RBI has permitted about 70 Indian companies to avail ECB under automatic route. RBI also allows by way of take-out finance for infrastructure companies to switch their rupee loan into ECB under approval route.

v  For issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

v  For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc., are also considered as investment in capital markets).

v  Individuals, Trusts and Non-Profit making organizations are not eligible to raise ECB.

v  Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

Conditions as regards to Securities to Foreign Lenders under ECB guidelines

Creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000, respectively, as amended from time to time. AD Category - I banks have been delegated powers to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. It is to be noted that there is a restriction for a foreign lender to acquire immovable property, the issue of personal or corporate guarantees and, creation of charge over financial securities. In case of default by the Indian borrowers, the foreign lenders are not eligible to acquire automatically the immovable property charged to them in India. The international lender should sell such properties to an Indian resident and then repatriate the sale proceeds out of India.

TAKE-OUT FINANCE

As per the extant norms, refinancing of domestic Rupee loans with ECB is not permitted. However, keeping in view the special funding needs of the infrastructure sector, a scheme of take-out finance has been put in place. Accordingly, take-out financing arrangement through ECB, under the approval route, has been permitted for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects.

All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

The all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings are valid until reviewed: Average Maturity Period		All-in-cost Ceilings over 6 month LIBOR*
	Three years and up to five years	300 basis points
	More than five years	500 basis points

ECB by NON BANKING FINANCIAL COMPANIES (NBFC)

Non-Banking Financial Companies (NBFCs) are eligible to raise ECB under approval route from eligible lenders. Infrastructure Finance Companies (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy. Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects is allowed under current ECB guidelines.

ECB by Telecom Companies

The payment by eligible borrowers in the Telecom sector, for spectrum allocation may, initially, be met out of Rupee resources by the successful bidders, to be refinanced with a long-term ECB, under the approval route, subject to the following conditions:

(i) The ECB should be raised within 12 months from the date of payment of the final instalment to the Government;

(ii) The designated AD - Category I bank should monitor the end-use of funds;

(iii) Banks in India will not be permitted to provide any form of guarantees; and

(iv) All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, etc, should be complied with.

ECB CAN BE RAISED FOR LIQUIDATION OF OR PREPAYMENT OF FCCBs

RBI through its circular dated 4 July 2011 has briefed that Fresh ECBs/ FCCBs can be raised with the stipulated average maturity period and applicable all-in-cost being as per the extant ECB guidelines; The amount of fresh ECB/FCCB shall not exceed the outstanding redemption value at maturity of the outstanding FCCBs; The fresh ECB/FCCB shall not be raised six months prior to the maturity date of the outstanding FCCBs;
The purpose of ECB/FCCB shall be clearly mentioned as ‘Redemption of outstanding FCCBs’ in Form 83 at the time of obtaining Loan Registration Number from the Reserve Bank; The designated AD - Category I bank would monitor the end-use of funds; All other aspects of ECB policy under the automatic route, such as, eligible borrower, recognised lender, end-use, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged;
ECB / FCCB beyond USD 500 million for the purpose of redemption of the existing FCCB will be considered under the approval route; and ECB / FCCB availed of for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of USD 500 million available under the automatic route as per the extant norms.

Parking of ECB proceeds

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses.

ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (c) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.

ECB funds may also be repatriated to India for credit to the borrowers’ Rupee accounts with AD Category I banks in India, pending utilization for permissible end-uses.

An ECB borrower is required to keep ECB funds parked abroad till the actual requirement in India. Further, as per RBI norms, a borrower cannot utilize the funds for any other purpose as there are end use restrictions for ECB. However, Reliance Infrastructure now Reliance Energy has parked its foreign loan proceeds worth $300 million with its mutual fund in India for 315 days, and then repatriated the money abroad to a joint venture company. These actions, according to an RBI, violated various provisions of the Foreign Exchange Management Act (FEMA). In doing so, Reliance had not applied for prior approval of RBI as it contravened the end use restrictions and also it repatriated the ECB funds for investments in its overseas joint venture without prior approval of RBI.

For the justification of its levy of fine of Rs 125 Crores, RBI viewed that as the Reliance has made additional income of Rs 124 crores by parking its ECB in its mutual funds in contravention of ECB end use restrictions. Hence, borrowing companies in India should be very careful about the parking of funds abroad or end use of the same in India.

Statistics on ECB in India

Reserve Bank of India (RBI) has allowed ECB during the month of May 2011 (latest month statistics) as per details given below:

Under Automatic Route	Under RBI Approval Route	Total ECB collected
USD 1,497,371,540	USD 11,55,449.288	USD 2,652,820,828

RBI has allowed the maturity period for the ECB from minimum of 3 years to the maximum of 14 years 3 months. The purpose for which ECB has been allowed has been given as under:

ü  Rupee Expenditure Loc.CG                                 

ü  New Project

ü  Import of Capital Goods

ü  Onward/Sub-lending

ü  Import of Capital Goods

ü  Modernisation

ü  Power

ü  Road

ü  Overseas Acquisition

ü  Port

ü  Micro Finance

ü  Refinance of INR Loan 3-G Spectrum Fee

RBI has permitted during the month of May 2011 alone about 70 Indian companies to avail ECB under automatic route and about 10 Indian companies are allowed to access ECB under approval route.

Conclusion

As I said, ECB is an excellent financial engineering tool where CFO can use the same to bring down their finance costs and to enhance the bottom line of the company but it has to be carried with abundance prudence and caution as there involves foreign exchange fluctuation risks where in certain scenarios it may exceed the costs of local borrowing but such risks can be averted by resorting to forex hedging tools against future fluctuations in forex rates.

For any clarification or assistance , please feel free to contact me through rvsekar2007@gmail .com or 919848915177.