What is the procedure for conversion of suppliers credit (period of less than 3years) into equity shares?
ECB refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. ECB can be accessed under two routes, viz., (i) Automatic Route outlined in paragraph 1(A) and (ii) Approval Route indicated in paragraph 1(B).
Since ECB definition includes Supplier's Credit , conversion of suppliers credit to equity is permitted and the procedures are detailed in the under mentioned master circular issued by the RBI for conversion of ECB into Equity is also applicable to conversion of supplier's credit to Equity as per the following terms and conditions.
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5786#L37
CONVERSION OF ECB INTO EQUITY
(i) Conversion of ECB into equity is permitted subject to the following conditions :
(a) The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable
(b) The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
(c) Pricing of shares is as per the pricing guidelines issued under FEMA, 1999 in the case of listed/ unlisted companies.
(ii) Conversion of ECB may be reported to the Reserve Bank as follows :
(a) Borrowers are required to report full conversion of outstanding ECB into equity in the form FC-GPR to the Regional Office concerned of the Reserve Bank as well as in form ECB-2 submitted to the DSIM, RBI within seven working days from the close of month to which it relates. The words "ECB wholly converted to equity" should be clearly indicated on top of the ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary.
(b) In case of partial conversion of outstanding ECB into equity, borrowers are required to report the converted portion in form FC-GPR to the Regional Office concerned as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words "ECB partially converted to equity" should be indicated on top of the ECB-2 form. In subsequent months, the outstanding portion of ECB should be reported in ECB-2 form to DSIM.
Showing posts with label ECB guidelines. Show all posts
Showing posts with label ECB guidelines. Show all posts
Tuesday, September 28, 2010
Monday, September 27, 2010
All About Investment by an Indian Company in its Foreign JV OR WOS
How much an Indian Company can invest in the shares of a foreign company? How much an Indian Resident can invest in shares of a foreign company?
As per RBI Master Circular No.05/2010-11 dated July 01, 2010, in terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 100 per cent of the net worth of the Indian party, i.e. a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932, making investment in a JV/WOS abroad and includes any other entity in India excluding individuals as may be notified by the Reserve Bank as on the date of the last audited balance sheet.
How much it can invest ?
Under automatic route , up-to 100% net worth of investing company in its foreign subsidiary or JV Company.
Financial commitment means the amount of direct investment outside India by way of contribution to equity and loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas Holding company.
Payment should be routed through your authorised dealer (banker).
No prior registration with the Reserve Bank is necessary for making direct investments under the automatic route. After the report of the first remittance/investment in form ODI is received by the Reserve Bank, from the designated Authorized Dealer, an Identification Number for that particular JV/WOS will be issued for the purpose of taking on record the overseas direct investment with the objective of maintaining a database for monitoring the outflows/inflows in respect of the overseas entities. Subsequent investments in the same project can be made only after allotment of the Identification Number.
Loans can be made by a subsidiary to foreign holding company and Form ODI has to be submitted to Authorised dealer. Under FEMA , investment in equity , lending loan and extending guarantee will all fall under ODI.
A subsidiary can make direct investment outside India by way of contribution to equity and loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas Holding company.
However , the holding company cannot make further investment in the subsidiary if it is making a loan to the holding company..
Can an Indian Company invest in shares of a Foreign Company where there is no JV or WOS?
Yes. As per RBI guidelines , if there is no JV or WOS , an Indian companies can invest up to 50 % of their net worth as on the date of the last audited Balance Sheet in overseas companies, listed on a recognized stock exchange, or by way of rated debt securities issued by such companies.
If the investing company is an Indian company , then it can invest in any foreign listed company up to 50% of its net worth under automatic route else it has get the prior approval from RBI if it wants to invest in unlisted foreign company , or if the Indian company is not a listed company.
Can proceeds raised through ECB are allowed to invest in Equity shares of JV or WOS in abroad?
ECB proceeds can be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.
As per RBI Master Circular No.05/2010-11 dated July 01, 2010, in terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 100 per cent of the net worth of the Indian party, i.e. a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932, making investment in a JV/WOS abroad and includes any other entity in India excluding individuals as may be notified by the Reserve Bank as on the date of the last audited balance sheet.
How much it can invest ?
Under automatic route , up-to 100% net worth of investing company in its foreign subsidiary or JV Company.
Financial commitment means the amount of direct investment outside India by way of contribution to equity and loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas Holding company.
Payment should be routed through your authorised dealer (banker).
No prior registration with the Reserve Bank is necessary for making direct investments under the automatic route. After the report of the first remittance/investment in form ODI is received by the Reserve Bank, from the designated Authorized Dealer, an Identification Number for that particular JV/WOS will be issued for the purpose of taking on record the overseas direct investment with the objective of maintaining a database for monitoring the outflows/inflows in respect of the overseas entities. Subsequent investments in the same project can be made only after allotment of the Identification Number.
Loans can be made by a subsidiary to foreign holding company and Form ODI has to be submitted to Authorised dealer. Under FEMA , investment in equity , lending loan and extending guarantee will all fall under ODI.
A subsidiary can make direct investment outside India by way of contribution to equity and loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas Holding company.
However , the holding company cannot make further investment in the subsidiary if it is making a loan to the holding company..
Can an Indian Company invest in shares of a Foreign Company where there is no JV or WOS?
Yes. As per RBI guidelines , if there is no JV or WOS , an Indian companies can invest up to 50 % of their net worth as on the date of the last audited Balance Sheet in overseas companies, listed on a recognized stock exchange, or by way of rated debt securities issued by such companies.
If the investing company is an Indian company , then it can invest in any foreign listed company up to 50% of its net worth under automatic route else it has get the prior approval from RBI if it wants to invest in unlisted foreign company , or if the Indian company is not a listed company.
Can proceeds raised through ECB are allowed to invest in Equity shares of JV or WOS in abroad?
ECB proceeds can be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.
Saturday, September 25, 2010
Can ECB raised for repayment of Term Loan or Working Capital ?
There are end use restrictions and as of now , ECB cannot be availed for working capital purpose.
ECBs are being permitted by the Government as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.
END-USE REQUIREMENTS
.(A) External commercial loans are to be utilized for import of capital goods and services (on FOB or CIF basis) and for the project related expenditure in all sectors subject to following conditions :
(a) ECB raised for project-related rupee expenditure must be brought into the country immediately.
(b) ECB raised for import of capital goods and services should be utilized at the earliest and corporates should strictly comply with RBI's extant guidelines on parking ECBs outside till actual imports. RBI would be monitoring ECB proceeds parked outside.
(c) ECB raised is not permitted for investment in stock market or in real estate.
(B) Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from Indian shipyards. (C) Under no circumstances, ECB proceeds will be utilized for -
( i) Investment in stock market; and
(ii) Speculation in real estate.
ECBs only for import of capital goods and project-related rupee expenditure. Such Recycled Funds may not be on lent for the following purposes :
(i) Investment in Real Estate;
(ii) Investment in Stock markets including secondary market trading;
(iii) Working capital purposes;
(iv) General corporate purposes
Corporate’s who have foreign exchange earnings are permitted to raise ECB up to thrice the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate.
If you have adequate foreign exchange earnings and you can raise ECB thrice of your annual export earnings without any end use restriction. That is you can use the ECB in such cases to repay your working capital or term loan availed from the bank.
In other scenarios , ECB is not permitted to repay working capital or term loans in India.
ECBs are being permitted by the Government as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.
END-USE REQUIREMENTS
.(A) External commercial loans are to be utilized for import of capital goods and services (on FOB or CIF basis) and for the project related expenditure in all sectors subject to following conditions :
(a) ECB raised for project-related rupee expenditure must be brought into the country immediately.
(b) ECB raised for import of capital goods and services should be utilized at the earliest and corporates should strictly comply with RBI's extant guidelines on parking ECBs outside till actual imports. RBI would be monitoring ECB proceeds parked outside.
(c) ECB raised is not permitted for investment in stock market or in real estate.
(B) Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from Indian shipyards. (C) Under no circumstances, ECB proceeds will be utilized for -
( i) Investment in stock market; and
(ii) Speculation in real estate.
ECBs only for import of capital goods and project-related rupee expenditure. Such Recycled Funds may not be on lent for the following purposes :
(i) Investment in Real Estate;
(ii) Investment in Stock markets including secondary market trading;
(iii) Working capital purposes;
(iv) General corporate purposes
Corporate’s who have foreign exchange earnings are permitted to raise ECB up to thrice the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate.
If you have adequate foreign exchange earnings and you can raise ECB thrice of your annual export earnings without any end use restriction. That is you can use the ECB in such cases to repay your working capital or term loan availed from the bank.
In other scenarios , ECB is not permitted to repay working capital or term loans in India.
Can A Pvt Company Accepts Deposits from Non-resident Shareholder ?
Question:
A Private company in India wants to accept deposit from a non-resident shareholder.
Can it do so? What are the compliance's required under FEMA?
Comments:
If your company is a private limited company and if you accept deposits from non-resident , then it contravenes the provisions of 3 (iii) of the Companies Act ,1956 which is reproduced as below:
(iii) "private company" 5[means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,-]
(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to fifty not including-
(i) persons who are in the employment of the company, and
(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;
6[(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member.
There is no question of accepting deposits from a non- resident shareholders . Then , the private company will loose its character. Please term it as unsecured loan from a non-resident member. ( as private limited companies can avail unsecured loans from its members).
Preference shares that are fully and mandatorily convertible into equity shares within a specified time will be considered a part of the investee company’s share capital—and only such preference shares will be issued to foreign investors under the automatic approval route (that is, without requiring permission from the Ministry of Commerce) of Foreign Direct Investments (FDI).
The transaction would attract ECB Guidelines under FEMA. The Indian private company qualifies as eligible borrower. The non resident shareholder in order to qualify as recognized lender shall must be holding at-least 25% of paid up equity in the stated Indian private company. Further the funds can be raised only for permissible end uses and in compliance with other formalities as enumerated in the Master Circular on ECB dated July 01, 2010.
As per Regulation 7 1) of Foreign Exchange Management (Deposit) Regulations, 2000, A company registered under Companies Act, 1956 or a body corporate or created under an act of Parliament or State Legislature may accept deposits from a nonresident Indian on repatriation basis, subject to the terms and conditions mentioned in Schedule 6 of the regulation. Schedule 6 of the Regulation specifies certain conditions.
The regulation 7(1) of the FEMA deals generally and it is meant for public companies and I assume that it is not for private companies. In view of the ambiguity in FEMA regulation , it is wise to term it unsecured loan from non-resident shareholders and intimation to such effect may be given to your local RBI ECD Division through your authorised dealer.
Thus , a private Ltd company can issue on-convertible, optionally convertible or partially convertible preference shares are considered as debt finance and therefore subject to stringent External Commercial Borrowings (ECBs) guidelines to its overseas directors who wants to lend to their Indian Company.
For any clarification or further details , please contact me through rvsekar2007@gmail.com or 09848915177.
A Private company in India wants to accept deposit from a non-resident shareholder.
Can it do so? What are the compliance's required under FEMA?
Comments:
If your company is a private limited company and if you accept deposits from non-resident , then it contravenes the provisions of 3 (iii) of the Companies Act ,1956 which is reproduced as below:
(iii) "private company" 5[means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,-]
(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to fifty not including-
(i) persons who are in the employment of the company, and
(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;
6[(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member.
There is no question of accepting deposits from a non- resident shareholders . Then , the private company will loose its character. Please term it as unsecured loan from a non-resident member. ( as private limited companies can avail unsecured loans from its members).
Preference shares that are fully and mandatorily convertible into equity shares within a specified time will be considered a part of the investee company’s share capital—and only such preference shares will be issued to foreign investors under the automatic approval route (that is, without requiring permission from the Ministry of Commerce) of Foreign Direct Investments (FDI).
.
Foreign investments through non-convertible, optionally convertible or partially convertible preference shares are considered as debt finance and therefore subject to stringent External Commercial Borrowings (ECBs) guidelines.The transaction would attract ECB Guidelines under FEMA. The Indian private company qualifies as eligible borrower. The non resident shareholder in order to qualify as recognized lender shall must be holding at-least 25% of paid up equity in the stated Indian private company. Further the funds can be raised only for permissible end uses and in compliance with other formalities as enumerated in the Master Circular on ECB dated July 01, 2010.
As per Regulation 7 1) of Foreign Exchange Management (Deposit) Regulations, 2000, A company registered under Companies Act, 1956 or a body corporate or created under an act of Parliament or State Legislature may accept deposits from a nonresident Indian on repatriation basis, subject to the terms and conditions mentioned in Schedule 6 of the regulation. Schedule 6 of the Regulation specifies certain conditions.
The regulation 7(1) of the FEMA deals generally and it is meant for public companies and I assume that it is not for private companies. In view of the ambiguity in FEMA regulation , it is wise to term it unsecured loan from non-resident shareholders and intimation to such effect may be given to your local RBI ECD Division through your authorised dealer.
Thus , a private Ltd company can issue on-convertible, optionally convertible or partially convertible preference shares are considered as debt finance and therefore subject to stringent External Commercial Borrowings (ECBs) guidelines to its overseas directors who wants to lend to their Indian Company.
For any clarification or further details , please contact me through rvsekar2007@gmail.com or 09848915177.
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