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