With an increase in cross-border transactions, both inbound & outbound, there is a heightened need to understand & ensure compliance with complex, evolving legislations covered under the Foreign Exchange Management Act (FEMA) 1999. We do a systematic analysis of all Forex Transactions of the client and examine the compliance of Foreign Exchange Management Act and provide Forex transaction advisory / FEMA Advisory.
This will enable the company to know if any violations under FEMA are committed.
Foreign Exchange laws / Foreign Exchange Management Act are /is one of the most stringent law of the country and are /is subject to changes at rapid pace. As an organization, it is necessary to make sure that all your transactions related to foreign exchanges are in compliance with law and if not, necessary precautionary measures shall be undertaken to rectify the same.
Here, we analyse all transactions, inbound & outbound, undertaken during the period under scrutiny from the point of compliance with foreign exchange laws and provide required FEMA Advisory including remedial measures, in case of any deficiency.
We help you with compliances under following heads :
Foreign Direct Investment
Overseas Direct Investment
Liberalized Remittance Scheme
External Commercial Borrowing
All the above investments need reporting or approval from RBI.
FOREIGN DIRECT INVESTMENTS
Source ( Reserve Bank of India Public Information available on Website )
Answer: The routes under which foreign investment can be made is as under:
- Automatic Route: Foreign Investment is allowed under the automatic route without prior approval of the Government or the Reserve Bank of India, in all activities/ sectors as specified in the Regulation 16 of FEMA 20 (R).
- Government Route: Foreign investment in activities not covered under the automatic route requires prior approval of the Government. Procedure for applying for Government approval is given at http://fifp.gov.in/Forms/SOP.pdf
Answer: ‘Capital Instruments’ means equity shares, debentures, preference shares and share warrants issued by the Indian company.
Equity shares: Equity shares are those issued in accordance with the provisions of the Companies Act, 2013 and will include partly paid equity shares issued on or after July 8, 2014.
Share warrants: Share warrants issued on or after July 8, 2014 will be considered as capital instruments.
Debentures: ‘Debentures’ means fully, compulsorily and mandatorily convertible debentures.
Preference shares: ‘Preference’ shares means fully, compulsorily and mandatorily convertible preference shares.
Non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity are reckoned to be FDI compliant capital instruments. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 and optionally convertible/ partially convertible debentures issued after June 7, 2007 shall be treated as debt and shall require conforming to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange Regulations), 2000, as amended from time to time
Answer: Tenor of convertible instruments will be guided by the instructions framed under the Companies Act, 2013 and the rules framed thereunder. However, the investee company should ensure that the price/ conversion formula of convertible capital instruments is determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.
Answer: A convertible note is an instrument issued by a start-up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.
Answer: A person resident outside India (other than an individual who is a citizen of Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian start-up company for an amount of twenty five lakh rupees or more in a single tranche. A start-up company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with the approval of the Government. The amount of consideration should be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account maintained by the person concerned.
Answer: Foreign Investment means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP.
Foreign Direct Investment (FDI) is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company; or (b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.
Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is (a) less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company or (b) less than 10 percent of the paid up value of each series of capital instruments of a listed Indian company.
Answer: Fully diluted basis means the total number of shares that would be outstanding if all possible sources of conversion are exercised.
Answer: No, FDI and FPI are agnostic from the point of view of the schedule under which investment has been made. It is the percentage which defines whether it is direct or portfolio investment.
Answer: Once an FDI always an FDI.
Answer: As long as the foreign shareholding in the entity remains the same and there is no corporate action pursuant to the sector being brought under approval route, approval is not required.
Answer: Please refer to the ‘Standard Operating Procedure (SOP) for Processing FDI Proposals’ issued by Department of Industrial Policy & Promotion, Government of India → http://fifp.gov.in/Forms/SOP.pdf
Answer: Indian company includes all those entities covered under section 1(4) of the Companies Act, 2013.
Answer: Foreign investment percentage has to be calculated on a fully diluted basis i.e. at the time of issuance of Employee Stock Options.
Answer: Financial Markets Regulation Department, RBI.
Answer: All foreign investments are repatriable (net of applicable taxes) except in cases where the investment is made or held on non-repatriation basis.
Answer: Investment on repatriation basis means an investment, the sale/ maturity proceeds of which are, net of taxes, eligible to be repatriated out of India. The expression investment on non-repatriation basis may be construed accordingly.
Answer: Please refer to regulation 11 of FEMA 20(R).
|Particulars||Listed Company||Un-Listed Company|
|Issue by an Indian company or transferred from a resident to non-resident – Price should not be less than||The price worked out in accordance with the relevant SEBI guidelines||The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant.|
|Transfer from a non-resident to resident – Price should not be more than||The price worked out in accordance with the relevant SEBI guidelines||The fair value as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.|
Answer: FDI linked performance conditions are the sector specific conditions stipulated in regulation 16 of FEMA 20(R) for companies receiving foreign investment
Answer: Only NRIs/ OCIs are allowed to invest in partnership/ proprietorship concerns in India on non-repatriation basis.
Answer: There are no restrictions under FEMA for investment in Rights shares issued at a discount by an Indian company under the provisions of the Companies Act, 2013. The offer on rights basis to the persons resident outside India shall be:
- in case of shares of a company listed on a recognized stock exchange in India, at a price, as determined by the company; and
- in case of shares of a company not listed on a recognized stock exchange in India, at a price, which is not less than the price at which the offer on right basis is made to resident shareholders.
Answer: No, renunciation of rights shares shall be done in accordance with the instructions contained in Para 6.11 of Master Direction – Foreign Investment in India dated January 4, 2018, read with Regulation 6 of FEMA 20(R).
Answer: The following persons can acquire capital instruments on the stock exchanges:
- FPIs registered with SEBI
- Other than (a) and (b) above, a person resident outside India, can acquire capital instruments on stock exchange, subject to the condition that the investor has already acquired and continues to hold the control of such company in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations and subject to conditions specified in Annex I of the Master Direction – Foreign Investment in India.
Answer: The capital instrument has to be issued by the Indian company within sixty days from the date of receipt of the consideration.
Answer: If the capital instruments are not issued by the Indian company within sixty days from the date of receipt of the consideration, the amount so received has to be refunded to the person concerned by outward remittance, through banking channels or by credit to his NRE/ FCNR (B) accounts, as the case may be, within fifteen days from the date of completion of sixty days.
Answer: In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis, within a period not exceeding eighteen months from the date of the transfer agreement. The amount deferred can also be either in the form of an indemnity or an Escrow. In all cases, the pricing guidelines should be complied with.
Answer: Form FC-TRS has to be filed with the AD bank on receipt of every tranche of payment. The onus of reporting shall be on the resident transferor/ transferee.
Answer: Downstream investment is investment made by an Indian entity which has total foreign investment in it or an Investment Vehicle in the capital instruments or the capital, as the case may be, of another Indian entity.
If the investor company has total foreign investment in it and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India then such investment shall be “Indirect Foreign Investment” for the investee company.
Answer: Downstream investment made in accordance with the guidelines in existence prior to February 13, 2009 would not require any modification to conform to these regulations. All other investments, after the said date, would come under the ambit of FEMA 20(R). Downstream investments made between February 13, 2009 and June 21, 2013 which were not in conformity with these regulations should have been intimated to the Reserve Bank by October 3, 2013, for treating such cases as compliant with these regulations.
Answer: Yes. Also, FC-TRS is required to be filed by the Indian company.
Answer: Form FC-TRS is required to be filed for transfer of capital instruments by way of sale in accordance with FEMA 20(R), from:
- a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a non-repatriable basis;
- a person resident outside India holding capital instruments in an Indian company on non-repatriable basis to a person resident outside India holding capital instruments on repatriable basis;
- a person resident outside India holding capital instruments in an Indian company on repatriable basis to a person resident in India;
- a person resident in India holding capital instruments in an Indian company to a person resident outside India holding capital instruments on repatriable basis.
Sale of capital instruments on a recognized stock exchange by a person resident outside India as prescribed in regulation 10(3) of FEMA 20(R) has to be reported by such person in Form FC-TRS.
FC-TRS is not required for:
- for transfer of shares of an Indian company from a non-resident holding the shares on non-repatriable basis to a resident and vice versa.
- for transfer of shares from a person resident outside India holding capital instruments in an Indian company on a repatriable basis to a person resident outside India holding capital instruments on a repatriable basis
- for transfer of shares by way of gift.
The onus of reporting is on the resident (transferor or transferee) or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be. The form FC-TRS has to be filed with the AD bank within sixty days of receipt/ remittance of funds or transfer of capital instruments whichever is earlier.
Answer: Foreign Portfolio Investors (FPIs) registered in accordance with the provisions of SEBI (FPI) Regulations and NRIs/ OCIs can make investment on the stock exchanges in India, subject to the individual and aggregate limits prescribed in schedules 2 and 3, respectively of FEMA 20(R).
Answer: Foreign Portfolio Investors (FPIs), Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), Foreign Central Banks, Multilateral Development Bank, Long term investors like Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds and Pension Funds which are registered with SEBI Long Term Investors may invest in other securities as specified in Schedule 5 to Notification No FEMA 20.
Answer: Foreign Venture Capital Investor’ (FVCI) means an investor incorporated and established outside India and registered with Securities and Exchange Board of India under Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000
Answer: A SEBI registered Foreign Venture Capital Investor may make investment in terms of schedule 7 of FEMA 20(R) as per the conditions prescribed therein.
Answer: The amount of consideration for all investment by an FVCI has to be received/made through inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained by the FVCI with an AD bank in India. The foreign currency account and SNRR account shall be used only and exclusively for transactions under the relevant Schedule.
Answer: The sale/ maturity proceeds (net of taxes) of the securities may be remitted outside India or credited to the foreign currency account or a Special Non-resident Rupee Account of the FVCI.
Answer: Investment Vehicle is an entity registered and regulated under relevant regulations framed by SEBI or any other authority designated for the purpose. For the purpose of Schedule 8 of FEMA 20(R), an Investment Vehicle is a Real Estate Investment Trust (REIT) governed by the SEBI (REITs) Regulations, 2014, an Infrastructure Investment Trust (InvIt) governed by the SEBI (InvIts) Regulations, 2014 and an Alternative Investment Fund (AIF) governed by the SEBI (AIFs) Regulations, 2012. It does not include a Venture Capital Fund registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.
Answer: Investment made by an Investment Vehicle into an Indian company or an LLP will be indirect foreign investment for the investee company or the LLP, as the case may be, if either the Sponsor or the Manager or the Investment Manager (i) is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India.
Answer: An Alternative Investment Fund (Category III) with foreign investment can make portfolio investment in only those securities or instruments in which an FPI is allowed to invest under the Act, rules or regulations made thereunder.
Answer: For the transactions undertaken on or after November 7, 2017, in case of reporting delays, the person/ entity responsible for filing the reports as provided in Part IV of the Master Direction on Reporting shall be liable for payment of Late Submission Fee (LSF). The payment of LSF is an additional option for regularising reporting delays without undergoing the compounding procedure.
Answer: The payment of LSF is an additional facility for regularising reporting delays without undergoing the compounding procedure. However, this does not mean that the applicant cannot apply for compounding. Both options are available to the applicant for the transactions undertaken on or after November 7, 2017.
Answer: Foreign investment can be made based on a notification issued under FEMA, 1999.
OVERSEAS DIRECT INVESTMENTS
Source (Reserve Bank of India Public Information available on Website )
Answer. The guidelines have been notified by the Reserve Bank of India vide Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, which can be accessed at the Reserve Bank’s website http://www.rbi.org.in/scripts/Fema.aspx. A Master Direction titled ‘Master Direction on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad’ has been issued. The Master Directions consolidate instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions and is available at ‘Notification’ Section on RBI’s website https://www.rbi.org.in.
Any further clarifications in respect of cases not covered by the instructions may be obtained, giving full details of the case, from the Central Office of the Reserve Bank at the following address:
The Chief General Manager
Reserve Bank of India
Foreign Exchange Department
Overseas Investment Division
Central Office, Amar Building, 5th Floor
Mumbai 400 001. or by e-mail
Answer: Direct investment outside India means investments, either under the Automatic Route or the Approval Route, by way of contribution to the capital or subscription to the Memorandum of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, signifying a long-term interest in the foreign entity (JV or WOS).
This is different from portfolio investment which is explained in answer to Q. 44.
Answer: General permission has been granted to persons (individual) resident in India for purchase / acquisition of securities as under:
- a) Out of funds held in the RFC account;
b) As bonus shares on existing holding of foreign currency shares;
c) When not permanently resident in India, from the foreign currency resources outside India.
General permission is also available to sell the shares so purchased or acquired.
A resident Indian can remit, up to the limit prescribed by the Reserve Bank from time to time, per financial year under the Liberalised Remittance Scheme (LRS), for permitted current and capital account transactions including purchase of securities and also setting up/acquisition of JV/WOS overseas with effect from August 5, 2013 (vide Notification No. 263).
Answer:An Indian Party can make overseas direct investment in any bonafide activity.
Real estate as defined in Notification No. FEMA 120/RB-2004 dated July 7, 2004 and banking business are the prohibited sectors for overseas direct investment. Real estate business means buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges.
However, Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act, 1949, from the Department of Banking Regulation (DBR), CO, RBI.
An overseas JV / WOS, having direct or indirect equity participation by an Indian party, shall not offer financial products linked to Indian Rupee (e.g. non-deliverable trades involving foreign currency, rupee exchange rates, stock indices linked to Indian market, etc.) without the specific approval of the Reserve Bank. Any incidence of such product facilitation would be treated as a contravention of the extant FEMA regulations and would consequently attract action under the relevant provisions of FEMA, 1999.
It may be noted that, for undertaking activities in the financial services sector, certain additional conditions as specified in Regulation 7 of the Notification ibid should be adhered to. Please refer answer to Q.32.
Answer: “Joint Venture (JV)”/ “Wholly Owned Subsidiary (WOS)” means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment;
A foreign entity is termed as JV of the Indian Party when there are other foreign promoters holding the stake along with the Indian Party. In case of WOS entire capital is held by the one or more Indian Company
Answer: Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a JV/WOS abroad. The Indian Party should approach an Authorized Dealer Category – I bank with an application in Form ODI and the prescribed enclosures / documents for effecting the remittances towards such investments. However, in case of investment in the financial services sector, prior approval is required from the regulatory authority concerned, both in India and abroad.
Form ODI is available as an Annex to the Master Direction titled ‘Master Direction on Reporting under Foreign Exchange Management Act’.
Proposals not covered by the conditions under the automatic route require prior approval of the Reserve Bank for which a specific application in Form ODI with the documents prescribed therein is required to be made through the Authorized Dealer Category – I banks.
Answer:The applicant should approach their designated Authorized Dealer (AD) with the proposal which shall be submitted to Reserve Bank after due scrutiny and with the specific recommendations of the designated AD bank along with supporting documents (as mentioned below) to the following address:
The Chief General Manager,
Reserve Bank of India,
Foreign Exchange Department,
Overseas Investment Division,
Amar Building, 5th Floor,
Sir P. M. Road, Fort,
The designated AD before forwarding the proposal should submit the Form ODI in the on-line OID application under approval route and the transaction number generated by the application should be mentioned in the letter.
In case the proposal is approved, the AD bank should effect the remittance under advice to Reserve Bank so that the UIN is allotted.
For approval by Reserve Bank, following documents need to be submitted along with Section D and Section E of Form ODI – Part I by the designated Authorized Dealer:
- a) A letter from the designated AD of the IP in a sealed cover mentioning the following details:
- Transaction number generated by the OID application.
• Brief details of the Indian entity.
• Brief details of the overseas entity.
• Background of the proposal, if any.
• Brief details of the transaction.
• Reason/s for seeking approval mentioning the extant FEMA provisions.
• Observations of the designated AD bank with respect to the following:
• Prima facie viability of the JV/ WOS outside India;
• Contribution to external trade and other benefits which will accrue to India through such investment;
• Financial position and business track record of the IP and the foreign entity;
• Expertise and experience of the IP in the same or related line of activity of the JV/ WOS outside India.
• Recommendations of the designated AD bank.
- b) A letter from the IP addressed to the designated AD bank.
- c) Board resolution for the proposed transaction/s.
- d) Diagrammatic representation of the organisational structure indicating all the subsidiaries of the IP horizontally and vertically with their stake (direct & indirect) and status (whether operating company or SPV).
- e) Incorporation certificate and the valuation certificate for the overseas entity (if applicable).
- f) Other relevant documents properly numbered, indexed and flagged.
Answer:The Indian party/ Resident Individual is required to route all transactions in respect of a particular overseas JV/WOS only through one branch of an Authorized Dealer. This branch would be the ‘designated Authorised Dealer’ in respect of that JV/WOS and all transactions and communications relating to the investment in that particular JV/WOS are to be reported only through this ‘designated’ branch of an Authorized Dealer. In case the JV/WOS is being set up abroad by two or more Indian promoters, then all Indian promoters collectively called the Indian party and the Resident Individual, would be required to route all transactions in respect of that JV/WOS only through one ‘designated Authorised Dealer’. In case the Indian Party/ Resident Individual wants to switch over to another AD, an application by way of a letter may be made to the Reserve Bank after obtaining an NOC from the existing Authorized Dealer.
The Indian promoters are free to designate different branches of the same Authorised Dealer or branches of other Authorised Dealers for their separate JVs/WOSs. The only requirement is that regardless of the number of promoters, one JV/WOS will have only one ‘designated Authorised Dealer’ to route all its transactions.
Answer: Some of the proposals which require prior approval are:
- i) Overseas Investments in the energy and natural resources sector exceeding the prescribed limit of the net worth of the Indian companies as on the date of the last audited balance sheet;
- ii) Investments in Overseas Unincorporated entities in the oil sector by resident corporates exceeding the prescribed limit of their net worth as on the date of the last audited balance sheet, provided the proposal has been approved by the competent authority and is duly supported by a certified copy of the Board Resolution approving such investment. However, Navaratna Public Sector Undertakings, ONGC Videsh Ltd and Oil India Ltd are allowed to invest in overseas unincorporated / incorporated entities in oil sector (i.e. for exploration and drilling for oil and natural gas, etc.), which are duly approved by the Government of India, without any limits, under the automatic route;
iii) Overseas Investments by proprietorship concerns and unregistered partnership firms satisfying certain eligibility criteria;
- iv) Investments by Registered Trusts / Societies (satisfying certain eligibility criteria) engaged in the manufacturing / educational / hospital sector in the same sector in a JV / WOS outside India;
- v) Corporate guarantee by the Indian Party to second and subsequent level of Step Down Subsidiary (SDS);
- vi) All other forms of guarantee which is offered by the Indian Party to its first and subsequent level of SDS;
vii) Restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables in the books of listed/ unlisted Indian Company satisfying certain eligibility criteria mentioned under Regulation 16A of notification ibid;
viii) Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will require the prior approval of the Reserve Bank; and
- ix) Proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route based on the business requirement of the Indian Party and legal requirement of the host country in which JV/WOS is located.
Answer: An Indian Party is eligible to make overseas direct investment under the Automatic Route. An Indian Party is 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 or a Limited Liability Partnership (LLP) incorporated under the LLP Act, 2008 and any other entity in India as may be notified by the Reserve Bank. When more than one such company, body or entity makes investment in the foreign JV / WOS, such combination will also form an “Indian Party”.
Answer: The criteria for overseas direct investment under the Automatic Route is as under:
- The Indian Party can invest up to the prescribed limit of its net worth (as per the last audited Balance Sheet) in JV / WOS for any bonafide activity permitted as per the law of the host country. The prescribed limit vis-a-vis the net worth will not be applicable where the investment is made out of balances held in the EEFC account of the Indian party or out of funds raised through ADRs/GDRs;
- The Indian Party is not on the Reserve Bank’s exporters’ caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL) /RBI or any other credit information company as approved by the Reserve Bank or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority; and
iii. The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party.
Answer: Investment in Pakistan is allowed under the approval route. Investments in Nepal can be only in Indian Rupees. Investments in Bhutan are allowed in Indian Rupees and in freely convertible currencies.
Answer: The Indian Party intending to make overseas direct investment under the automatic route is required to fill up form ODI duly supported by the documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate and Valuation report (in case of acquisition of an existing company) as per the valuation norms listed in answer to Q.31 and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance.
Answer: Per se no prior registration with the Reserve Bank is necessary for making direct investments under the automatic route. After the online report of the first remittance / investment in Form ODI for a JV / WOS in terms of A.P. (DIR Series) Circular No.62 dated April 13, 2016, a Unique Identification Number (UIN) for that particular JV/WOS is generated automatically and instantaneously. Subsequent investments in the same JV / WOS can be made only after allotment of the UIN.
Answer: Form ODI is available as an Annex to the Master Direction titled ‘Master Direction on Reporting under Foreign Exchange Management Act’.
With effect from April 13, 2016 Authorized Dealers Category – I banks have to file the revised ODI forms on-line in the Overseas Direct Investment Application with the Reserve Bank for allotment of UIN, reporting of subsequent remittances, filing of APRs, etc.. The revised procedure for submission of ODI forms has been issued vide A.P. (DIR Series) Circular No.62 dated April 13, 2016.
AD Category –I banks would continue to receive the ODI forms as also documents related to the post investment changes in the physical form from the Indian Party. These should be preserved UIN wise, for submission to the Reserve Bank, if and when specifically required
Answer:No, the allotment of UIN does not constitute an approval from the Reserve Bank for the investment made/to be made in the JV/WOS. The issue of UIN only signifies taking on record of the investment for maintaining the database. The onus of complying with the provisions of FEMA regulations rests with the AD bank and / or the Indian party.
Further, with effect from June 01, 2012 an auto generated e-mail, giving the details of UIN allotted to the JV / WOS under the automatic route, is forwarded to the AD / Indian party as confirmation of allotment of UIN, and no separate letter is issued by the Reserve Bank to the Indian party and AD Category – I bank confirming the allotment of UIN.
Answer: An eligible Indian party is free to acquire either a partial stake (JV) or the entire stake (WOS) in an already existing entity overseas, provided the valuation is as per the laid down norms. Please also see Q No. 31.
Answer: Financial commitment means the amount of direct investments outside India by an Indian Party –
- by way of contribution to equity shares or CCPS of the JV / WOS abroad
- contribution to the JV / WOS as preference shares (for reporting purpose to be treated as loan)
iii. as loans to its the JV / WOS abroad
- 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS and
- 50% of the amount of performance guarantee issued on behalf of its overseas JV/WOS.
- bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV / WOS of the Indian party, which is backed by a counter guarantee / collateral by the Indian party
vii. amount of fund/ non fund based credit facility availed by creation of charge (pledge / mortgage / hypothecation) on the movable / immovable property or other financial assets of the Indian party / its group companies
(Note: The amount and period of the guarantee should be specified upfront).
Answer: Funding for overseas direct investment can be made by one or more of the following sources:
- Drawal of foreign exchange from an AD bank in India.
- Swap of shares (refers to the acquisition of the shares of an overseas JV / WOS by way of exchange of the shares of the Indian party).
iii. Capitalization of exports and other dues and entitlements.
- Proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds.
- In exchange of ADRs / GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued by Government of India in the matter.
- Balances held in Exchange Earners Foreign Currency account of the Indian Party maintained with an Authorized Dealer.
vii. Proceeds of foreign currency funds raised through ADR / GDR issues.
Answer: Yes, the Indian party is permitted to issue performance guarantee and 50 per cent of the amount of the performance guarantees will be reckoned for the purpose of computing financial commitment to its JV/WOS overseas which should be within the limit prescribed by the Reserve Bank from time to time. Further, the time specified for the completion of the contract will be the validity period of the related performance guarantee. In cases where invocation of the performance guarantee breach the limit of the prescribed financial commitment, the Indian Party is required to seek prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.
Answer: Under the Approval Route the Indian party is permitted, to issue corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries, provided the Indian Party indirectly holds 51 per cent or more stake in the overseas second level step down operating subsidiary for which such guarantee is intended to be issued.
Answer: With effect from March 28, 2012, issuance of personal guarantee by the promoters of the Indian Party currently allowed under the General Permission has also been extended to the indirect resident individual promoters of the Indian Party with same stipulations as in the case of personal guarantee by the direct promoters.
Answer: No, as on date, a guarantee, which has been issued on behalf of the overseas JV / WOS / step down subsidiary, may be allowed to be rolled over under the automatic route without subjecting the rollover to FEMA compliance afresh, provided only the validity period of the existing guarantee is undergoing change. Any change in the end use of guarantee or overseas lender or rate of interest or amount or any other terms and conditions of the guarantee shall subject the rollover of guarantee to the extant FEMA compliance afresh.
Answer: No, the rollover of existing guarantee is to be reported online afresh by the AD bank with the revised validity date.
Answer: An Indian Party will have to comply with the following: –
- receive share certificates or any other documentary evidence of investment in the foreign JV / WOS as an evidence of investment and submit the same to the designated AD within 6 months;
- repatriate to India, all dues receivable from the foreign JV / WOS, like dividend, royalty, technical fees etc.;
iii. submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party. Revised Instructions for APR filing has been issued vide A.P. (DIR Series) Circular No.61 dated April 13, 2016.
- report the details of the decisions taken by a JV/WOS regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of the approval of those decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report; and
- in case of disinvestment, sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorised Dealer.
Answer: An Indian Party (IP) / Resident Individual (RI) which has made an Overseas Direct Investment (ODI) has to submit an Annual Performance Report (APR) in Form ODI Part III to the Reserve Bank by 30th of June every year in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India set up or acquired by the IP / RI (as prescribed under Regulation 15 of FEMA Notification, ibid).
With effect from April 13, 2016, the AD bank, before undertaking / facilitating any ODI related transaction on behalf of the eligible applicant, should necessarily check with its nodal office to confirm that all APRs in respect of all the JV / WOS of the applicant have been submitted. Further, certification of APRs by the Statutory Auditor or Chartered Accountant may not be insisted upon in the case of Resident Individuals. Self-certification may be accepted.
With effect from April 13, 2016, where multiple IPs / RIs have invested in the same overseas JV / WOS, the obligation to submit APR shall lie with the IP / RI having maximum stake in the JV / WOS. Alternatively, the IPs / RIs holding stake in the overseas JV / WOS may mutually agree to assign the responsibility for APR submission to a designated entity which may acknowledge its obligation to submit the APR in terms of Regulation 15 (iii) of Notification, ibid, by furnishing an appropriate undertaking to the AD bank.
Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:
- a) The Statutory Auditors of the Indian party certify that the law of the host country does not mandatorily require auditing of the books of accounts of JV/WOS and the figures in the APR are as per the un-audited accounts of the overseas JV/WOS.
- b) That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.
(c) The above exemption from filing the APR based on unaudited balance sheet will not be available in respect of JV/WOS in a country/jurisdiction which is either under the observation of the Financial Action Task Force (FATF) or in respect of which enhanced due diligence is recommended by FATF or any other country/jurisdiction as prescribed by Reserve Bank of India.
Answer: Delayed submission/ non-submission of APRs entail penal measures, as prescribed under FEMA 1999, against the defaulting Indian Party.
Answer: The shares of a JV/WOS can be pledged by an Indian Party as a security for availing fund based or non-fund based facility for itself or for the JV/WOS, from an authorised dealer/ public financial institution in India or from an overseas lender, provided the overseas lender is regulated and supervised as a bank and the total financial commitments of the Indian party remains within the limit stipulated by the Reserve Bank for overseas investment from time to time.
Answer: In case of partial / full acquisition of an existing foreign company where the investment is more than USD five million, share valuation of the company has to be done by a Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an Investment Banker/ Merchant Banker outside India registered with the appropriate regulatory authority in the host country and in all other cases by a Chartered Accountant/ Certified Public Accountant.
However, in the case of investment by acquisition of shares where the consideration is to be paid fully or partly by issue of the Indian Party’s shares (swap of shares), irrespective of the amount, the valuation will have to be done by a Category I Merchant Banker registered with SEBI or an Investment Banker/ Merchant Banker outside India registered with the appropriate regulatory authority in the host country.
In case of additional overseas direct investments by the Indian party in it’s JV / WOS, whether at premium or discount or face value, the concept of valuation, as indicated above, shall be applicable.
Answer: Only an Indian company engaged in financial services sector activities can make investment in a JV/WOS abroad in the financial services sector, provided it fulfills the following additional conditions:
- has earned net profit during the preceding three financial years from the financial services activities;
- is registered with the appropriate regulatory authority in India for conducting financial services activities;
iii. has obtained approval for undertaking such activities from the regulatory authorities concerned both in India and abroad before venturing into such financial activity;
- has fulfilled the prudential norms relating to capital adequacy as prescribed by the regulatory authority concerned in India; and
Any additional investment by an existing JV / WOS or its step down subsidiary in the financial services sector is also required to comply with the above conditions.
Regulated entities engaged in financial services sector activities in India making investment in non-financial services activities overseas are also required to comply with the additional conditions mentioned above.
Trading in Commodities Exchanges overseas and setting up of JV / WOS for trading in Overseas Commodities Exchanges will be reckoned as financial services activity and will require clearance from Securities and Exchange Board of India (SEBI) on account of merger of Forward Markets Commission with SEBI.
Answer: An Indian Party can utilize the networth of its Indian subsidiary/holding company to the extent not availed of by the holding company or the subsidiary company independently subject to :
- a) Holding company holds at least 51% direct stake in the Indian Party.
- b) The Indian party holds at least 51% direct stake in its subsidiary company
- c) The holding or subsidiary company furnishes a letter of disclaimer for the same in favour of the Indian Party.
This facility is not available to / from partnership firms.
Answer: Yes, an Indian Party is permitted to capitalise the payments due from the foreign JV / WOS towards exports, fees, royalties or any other dues from the foreign JV / WOS for supply of technical know-how, consultancy, managerial and other services within the ceilings applicable.
Capitalisation of export proceeds remaining unrealised beyond the prescribed period of realisation will require the prior approval of the Reserve Bank.
Indian software exporters are permitted to receive 25% of the value of their exports to an overseas software start-up company in the form of shares without entering into Joint venture Agreements, with the prior approval of the Reserve Bank.
(i) Loan and guarantee can be extended to an overseas entity only if there is already an existing equity / CCPS participation by way of direct investment.
However, based on the business requirement of the Indian Party and legal requirement of the host country in which JV/WOS is located, proposals from the Indian party for undertaking financial commitment without equity contribution in JV / WOS may be considered by the Reserve Bank under the approval route.
In case, however, the overseas entity is a first level step down operating subsidiary of the Indian party, guarantee may be issued by the Indian party on behalf of such step down operating subsidiary provided such guarantee is reckoned for the purpose of computing the total financial commitment of the Indian party.
In case, the overseas entity is a second or subsequent level step down operating subsidiary of the Indian party, guarantee may be issued by the Indian party on behalf of such step down operating subsidiary with prior approval of the Reserve Bank provided such Indian party holds indirect stake of not less 51% in the step down operating subsidiary and guarantee is reckoned for the purpose of computing the financial commitment of the Indian party.
- ii) Eligible Indian companies are allowed to participate in a consortium with other international operators to construct and maintain submarine cable systems on co-ownership basis under the automatic route.
Answer: With effect from March 28, 2012, Compulsorily Convertible Preference Shares (CCPS) are treated at par with equity shares and the Indian party is allowed to undertake financial commitment based on the exposure to JV by way of CCPS.
Answer: Direct investment outside India in a JV/WOS can be made by way of share swap arrangement. The share swap should be undertaken as per the regulation prescribed under FEMA Notification No 20 dated May 3, 2000.
Answer: Partnership firms registered under the Indian Partnership Act, 1932 can make overseas direct investments subject to the same terms and conditions as applicable to corporate entities.
Answer: Individual partners can hold shares for and on behalf of the partnership firm in an overseas JV/WOS, where the entire funding for the investments has been done by the firm and further provided that the host country regulations or operational requirements warrant such holding.
Answer: There are no restrictions on entities having JVs/WOSs abroad setting up second generation operating companies (step-down subsidiaries) within the overall limits applicable for investments under the Automatic Route. However, companies wishing to set up step-down operating subsidiaries to undertake financial sector activities will have to comply with the additional requirements for direct investment in the financial services sector as indicated in Q 32.
Answer: Yes, direct investment through the medium of a SPV is permitted under the Automatic Route, for the sole purpose of investment in JV/WOS overseas.
Answer: Where the JV/WOS has been established through a SPV, all funding to the operating step down subsidiary should be routed through the SPV only. However, in the case of guarantees to be given on behalf of the first level step down operating subsidiary, these can be given directly by the Indian Party provided such exposures are within the permissible financial commitment of the Indian Party.
Answer: Please see answer to Q.3 also.
Resident individuals can acquire/sell foreign securities without prior approval in the following cases: –
- as a gift from a person resident outside India;
- by way of ESOPs issued by a company incorporated outside India under Cashless Employees Stock Option Scheme which does not involve any remittance from India;
iii. by way of ESOPs issued to an employee or a director of Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or of an Indian company irrespective of the percentage of the direct or indirect equity stake in the Indian company;
- as inheritance from a person whether resident in or outside India;
- by purchase of foreign securities out of funds held in the Resident Foreign Currency Account maintained in accordance with the Foreign Exchange Management (Foreign Currency Account) Regulations, 2000; and
- by way of bonus/rights shares on the foreign securities already held by them.
Answer: Yes, listed 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 in the rated debt securities issued by such companies.
Answer: Yes, Reserve Bank has given General Permission to a resident individual to acquire foreign securities to the extent of the minimum number of qualification shares required to be held for holding the post of Director. Accordingly, resident individuals are permitted to remit funds under general permission for acquiring qualification shares for holding the post of a Director in the overseas company to the extent prescribed as per the law of the host country where the company is located and the limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.
The qualification shares held by the resident director should be reported in the capital structure of the JV/ WOS. The type of the Indian entity should be selected as “other Indian entity”.
Answer: Resident individuals are allowed under General Permission to acquire shares of a foreign entity in part / full consideration of professional services rendered to the foreign entity or in lieu of Director’s remuneration. The limit of acquiring such shares in terms of value shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.
Answer: Yes, a resident individual may acquire foreign securities by way of rights shares issued by a company incorporated outside India provided the existing shares were held in accordance with the provisions of FEMA.
Answer: General permission is available for the individual employees/Directors of an Indian promoter company engaged in the field of software for acquisition of shares of a JV/WOS abroad provided:
- the consideration for purchase does not exceed the ceiling as stipulated by RBI from time to time. The shares acquired by all the employees/directors do not exceed 5% of the paid-up capital of the Joint Venture or Wholly Owned Subsidiary outside India; and
- after allotment of such shares, the percentage of shares held by the Indian promoter company, together with shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to such allotment.
Resident employees of Indian companies in the knowledge based sectors including working directors may purchase foreign securities under the ADR/GDR linked stock option scheme provided that the consideration for purchase does not exceed the ceiling as stipulated by RBI from time to time.
Answer: Indian Mutual Funds registered with SEBI are permitted to invest within the overall cap of USD 7 billion in:
- ADRs / GDRs of the Indian and foreign companies;
- equity of overseas companies listed on recognized overseas stock exchanges; initial and follow on public offerings for listing at recognized overseas stock exchanges;
- foreign debt securities- short term as well as long term with rating not below investment grade – in the countries with fully convertible currencies;
- money market investments not below investment grade; repos where the counter party is not below investment grade;
- government securities where countries are not rated below investment grade;
- derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities;
- short term deposits with banks overseas where the issuer is rated not below investment grade; and
- units / securities issued by overseas Mutual Funds or Unit Trusts registered with overseas regulators.
Answer: Domestic Venture Capital Funds registered with SEBI may invest in equity and equity linked instruments of off-shore VCFs subject to an overall limit of USD 500 million.istered with overseas regulators.
Answer: Resident corporates and partnership firms registered under the Indian Partnership Act, 1932 may undertake agricultural operations including purchase of land incidental to such activity either directly or through their overseas offices, provided:
- a) the Indian party is otherwise eligible to invest under Regulation 6 of the Notification ibid and such investment is within the overall specified limits, and
- b) for the purpose of such investment by acquisition of land overseas the valuation of land is certified by a certified valuer registered with the appropriate valuation authority in the host country.
Answer: Disinvestment by the Indian party from its JV / WOS abroad may be by way of transfer / sale of equity shares to a non-resident / resident or by way of liquidation / merger / amalgamation of the JV / WOS abroad.
Yes, the Indian Party may disinvest without write off under the automatic route subject to the following:
- the sale is effected through a stock exchange where the shares of the overseas JV/ WOS are listed;
- if the shares are not listed on the stock exchange and the shares are disinvested by a private arrangement, the share price is not less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS;
iii. the Indian Party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS;
- the overseas concern has been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank;
- the Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India; and
- other terms and conditions prescribed under Regulation 16 of the Notification ibid.
Yes, an Indian Party may disinvest, under the automatic route, involving write off in the under noted cases:
- where the JV / WOS is listed in the overseas stock exchange;
- where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore;
- where the Indian Party is an unlisted company and the investment in the overseas JV / WOS does not exceed USD 10 million; and
- where the Indian Party is a listed company with net worth of less than Rs.100 crore but investment in an overseas JV/WOS does not exceed USD 10 million.
Yes. Item (i) to (vi) under part (b) of this question.
uthority in the host country.
Answer: Indian company which has set up WOS abroad or has at least 51% stake in an overseas JV may write off capital (equity / preference shares) or other receivables (such as loans, royalty, technical knowhow fees and management fees in respect of the JV /WOS) even while such JV / WOS continue to function subject to the following:
- Listed Indian companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV /WOS under the Automatic Route; and
- Unlisted companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV /WOS with prior approval of the Reserve Bank.
The write-off / restructuring have to be reported to the Reserve Bank through the designated AD bank within 30 days of write-off / restructuring. The write-off / restructuring is subject to the condition that the Indian Party should submit the following documents for scrutiny along with the applications to the designated AD Category – I bank under the Automatic as well as the Approval Routes:
- A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and
- Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.
Answer: With effect from April 2, 2012, an Indian party is allowed to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments wherever the host country regulation stipulate the same subject to certain terms and conditions.
Answer: All types of preference shares, other than CCPS, are to be treated as loan extended by the Indian party to its JV / WOS abroad and compliance to the provisions inter alia under Regulation 6(4) of the Notification No. FEMA.120/RB-2004 dated July 07, 2004, as amended from time to time, is to be ensured. The AD banks shall report funded exposure like preference capital, debentures, notes, bonds, etc. under the head ‘Loan’ in terms of instructions issued for filling Form ODI vide A.P. (DIR Series) Circular No.62 dated April 13, 2016.
Answer: Yes, a loan may be converted into equity / CCPS under the automatic route and reported to RBI through the designated AD bank by way of a letter. Conversion of loan into preference shares (other than CCPS) need not be reported to RBI.
Answer: In terms of the extant provisions under Regulation 16(2) of the Notification No. FEMA.120/RB-2004 dated July 07, 2004, as amended from time to time, the disinvestment proceeds are to be repatriated to India within the prescribed time limit. Therefore, conversion of equity based exposure into loan or other form of funded exposures like preference capital, debenture, etc., without repatriating the disinvestment proceeds to India, shall require prior approval of RBI.
Answer: Yes, as per A.P. (DIR Series) Circular No.62 dated April 13, 2016 reporting of the foreclosure / closure of an existing guarantee by an Indian party on behalf of its JV / WOS / step down subsidiary is to be reported. Further, any alteration in the amount and validity of an existing guarantee (issued on behalf of the JV / WOS / step down subsidiary in accordance with the extant FEMA provisions) may also be reported online accordingly.
Q.59: Whether the provisions of Regulation 4 (1) (iii) of Notification No. FEMA 3/2000-RB dated May 03, 2000 as amended, is applicable to the Authorised Dealer bank branch situated outside India for extending credit facilities in foreign currency to a wholly owned subsidiary abroad or a joint venture abroad of an Indian entity?
Answer: No, the provisions of Regulation 4 (1) (iii) of Notification No. FEMA 3/2000-RB dated May 03, 2000 are applicable only to the credit facilities extended to a Wholly Owned Subsidiary abroad or a Joint Venture abroad of an Indian entity, by an Authorised Dealer bank in India. A branch outside India of an Authorised Dealer being a bank incorporated or constituted in India, may extend foreign currency loans in the normal course of its banking business outside India.
Answer: The Indian Party can undertake ODI under automatic route if they are in compliance with Regulation 6 of Notification No FEMA 120 dated July 7, 2004 as amended from time to time and other applicable FEMA Regulation/guidelines. However, such investigation needs to be declared in Form ODI.
Q.61: Whether Notification No. FEMA.382/2016-RB dated January 02, 2017 prohibiting overseas direct investment (ODI) in a JV/ WOS set up/ acquired by Indian party under automatic route in FATF non-cooperative countries and jurisdictions is applicable only on countries identified by Financial Action Task Force (FATF) as “Call for action”?
Answer: Yes, the prohibition on ODI in terms of Notification No. FEMA.382/2016-RB dated January 02, 2017 is applicable only on countries identified by Financial Action Task Force (FATF) as “Call for action”.
Q.62: Is development/construction (and thereafter, sale) of residential /commercial premises by an overseas Joint Venture (JV) or Wholly Owned Subsidiary (WOS) treated as real estate business under ODI regulations (FEMA Notification No. FEMA 120/RB-2004 dated July 7, 2004 as amended from time to time)?
Answer: No. In terms of regulation 5(2) read with Regulation 2 (p) of FEMA Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, buying land for construction/development of residential/commercial premises (before selling) – as one integrated core activity, is not treated as real estate business activity.
EXTERNAL COMMERCIAL BORROWING
Source (Reserve Bank of India Public Information available on Website )
Answer:The interested party may refer to Master Direction No.5 dated January 1, 2016, as amended from time to time, on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers’ (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10204) for guidance on the extant framework on ECB.
Answer: The extant ECB framework announced through A.P. (DIR Series) Circular No. 32 dated November 30, 2015 became applicable from the date of publication of relative regulations in the Gazette of India, i.e., December 2, 2015.
Answer:Entities raising ECB under previous ECB framework can raise the said loans by March 31, 2016 provided the agreement in respect of the loan is already signed by December 1, 2015. Further, eligible entities can drawdown the ECB proceeds beyond the availability period of March 31, 2016 provided such ECBs are contracted on or before December 1, 2015 and such agreements provide availability period of ECB to be beyond March 31, 2016. In other words, all ECB loan agreements entered into prior to the date of the revised ECB framework coming into effect from December 02, 2015 may continue with the disbursement schedules post March 31, 2016, as already provided in the loan agreements without (requiring) further consent from the Reserve Bank or any AD bank.
Answer: Yes, extant ECB framework is different from the framework for issuance of Rupee denominated bonds overseas. To know more about the framework of issuance of Rupee denominated bonds overseas, interested party may refer to aforementioned Master Direction. Both these frameworks (ECB framework and framework for issuance of Rupee denominated bonds overseas) run separately/concurrently.
Answer: ECBs can be raised as:
- Loans, eg., bank loans, loans from equity holder, etc.
- Capital market instruments, e.g.,
- floating rate notes / fixed rate bonds / securitised instruments
- non-convertible, optionally convertible or partially convertible preference shares
- Buyers’ credit / suppliers’ credit
- Financial lease
* A foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian company in an overseas market in a currency different from that of the issuer. Investors have the option of redeeming their investment on maturity or converting the bonds into equity any time during the currency of the bond. The repayment of the principal is in the currency in which the money is raised. In case of a foreign currency exchangeable bond (FCEB), investors have the option of converting the bonds into equity of the offered company. The company issuing FCEB shall be part of the promoter group of the offered company and shall hold the equity shares being offered at the time of issuance of FCEB.
Answer: No, foreign currency loans given domestically by Authorised Dealer Category I banks out of the proceeds of FCNR (B) deposits do not come under the ECB framework.
Answer:No, NRI/PIO giving loan in Rupees to resident company by way of Non-Convertible Debentures (NCDs) through a public offer is not covered under the ECB framework. It is covered under Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 issued vide Notification No. FEMA 4/2000-RB dated May 3, 2000 as amended from time to time (as per the provisions contained in these Regulations, a company incorporated in India is permitted to raise Rupee denominated loan from an NRI / PIO only by way of issuance of NCDs through a public offer and is subject to other provisions contained in these Regulations).e all its transactions.
Answer: Interested party may note that borrowings from overseas have to be in compliance with the applicable ECB guidelines / provisions contained in the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 issued vide Notification No. FEMA 3/2000-RB dated May 3, 2000 as amended from time to time, as applicable / applicable provisions contained in the Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 issued vide Notification No. FEMA 4/2000-RB dated May 3, 2000 as amended from time to time.
Answer: The primary responsibility for ensuring that the borrowing is in compliance with the applicable ECB guidelines is that of the borrower concerned. Any contravention of the applicable provisions of ECB guidelines will invite penal action under the FEMA. Same would be the case for devising a structure which bypasses / circumvents ECB guidelines in any manner and / or raising borrowings in any other manner which is not permitted / disguising borrowing under the wrap of other kind of transactions (like raising export advance(s) without actual exports or raising of export advance by circumventing ECB guidelines by creating any structure overseas or otherwise, etc.) and / or contravening provisions of Regulations mentioned in question 9 above.
Answer: Interested party may please refer to the aforementioned Master Direction.
Answer: No, entities which are not covered within the provisions contained in Master Direction stated above [like companies doing trading business (whether online or otherwise), companies involve in activities like tourism, beauty parlour / beauty clinics, entertainment business, retail sales, e-commerce companies, etc., on any other activity not covered within these provisions] are not eligible to raise ECB.
Answer: No, only those companies in software sector space who are into development of software are eligible to raise ECB. Companies who are into designing and engineering consultancy, servicing of third-party software, providing ancillary IT related services, ITeS, etc., are not considered as software development companies for ECB purposes.
Answer: For the purpose of raising ECB, Infrastructure Sector has the same meaning as given in the Harmonised Master List of Infrastructure sub-sectors approved by Government of India vide Notification F. No. 13/06/2009-INF as amended / updated from time to time. Further, for the purpose of ECB, Exploration, Mining and Refinery sectors are also deemed as in the infrastructure sector. It is also clarified that addition of any sector or sub-sector in the Harmonized Master List by the Government of India automatically entitles such sector/sub-sector to raise ECB as ‘infrastructure’.
Answer: Companies who help in operations or building of infrastructure as defined in Harmonised Master List of Infrastructure sub-sectors issued by Ministry of Finance as mentioned in the question 14 above will be considered companies supporting infrastructure.
Answer: If the educational institute/university/ deemed university is registered as a company under the Companies Act 1956/2013, it can raise ECB as a part of infrastructure sub-sector. ECB guidelines as applicable for infrastructure companies would be applicable for such ECBs.
Answer: Individual limit under auto route as applicable to NBFC-IFCs/AFCs, i.e., USD 750 million per financial year under any of the three tracks, will be now available to HFCs also.
Answer: No, any entity which is recognised as a Startup by the Central Government as on date of raising ECB, would be eligible to raise ECB, irrespective of its business activities,.
Answer: Companies engaged in the business of Maintenance, Repair and Overhaul and freight forwarding eligible to raise ECBs should be from airline or shipping sector only.
Answer: ECB can be raised in Indian Rupees (INR) and / or any convertible currency. Any entity raising INR denominated ECB is not permitted to convert the liability arising out of this ECB into foreign currency liability in any manner or assuming foreign currency risk is any manner by either entering into a derivative contract or otherwise.
Answer: By prudentially regulated financial entities, we mean that the overseas entity is bound by prudential norms / regulations issued by the sector regulator(s) of the host country. This can be explained by giving the example of non-banking financial companies (NBFCs) in India. These NBFCs, in order to operate in non-banking financial sector space in India are issued Certificate of Registration by RBI (sector regulator). Further, after registration these companies are subject to supervision by RBI. Similar prudential norms / regulations should be applicable to the overseas financial entity by the respective overseas sector regulator in order for such entity qualifying as a recognised lender under prudentially regulated financial entity category.
Answer: No, all ECB guidelines including those related to minimum equity holding, are to be fulfilled during the whole tenure of the ECB and not only at the time of contracting of ECB.
Answer: No, it is only applicable to direct equity holders.
Answer: No, however, compulsorily and mandatorily convertible debentures (convertible within a specified time) and compulsorily and mandatorily convertible preference shares (convertible within a specified time) can be included for calculation of the equity in ECB liability to equity ratio.
Answer: Yes, however, the ECB should have minimum average maturity period of 5 years.
Answer: Yes, apart from ECB raised for refinancing where the proposed ECB amount may not be taken into account to avoid double counting.
Answer: Borrowing from a person resident outside India by way of issue of preference shares on or after April 30, 2007, other than those which are fully and mandatorily convertible into equity within a specified time, as well as borrowing from a person resident outside India by way of issue of debentures on or after June 07, 2007, other than those which are fully and mandatorily convertible into equity within a specified time, would be treated as ECB and has to conform to ECB guidelines. Thus, the borrowing raised through such instruments after aforesaid dates would be considered for calculation of ECB liability.
Answer: The individual limit for raising ECB under the automatic route will take into account all outstanding ECBs including the proposed one. However, refinancing of ECB amount will not be considered for arriving at individual limit per financial year.
Answer: Yes, as long as the ECBs are in compliance with the ECB guidelines for the respective tracks as per RBI guidelines.
Answer: All-in-cost should be within the applicable ceiling at all times, for eg., giving interest breaching the ceiling in first year and much lower in second year so as to comply on an average, is not permitted.
Answer: ECB can be raised under Track I and Track III for general corporate purpose (including working capital) only from foreign equity holders. The minimum average maturity period will be 5 years, irrespective of amount borrowed.
Answer: Yes, ECB can be raised under Track II for general corporate purpose (including working capital). The minimum average maturity period will be 10 years.
Answer: No. All activities under real estate are not permitted as eligible end use for raising ECB.
Answer: No. ECB raised under the previous framework can be used for end uses permitted under the old framework only.
Answer: Yes, however, for Tracks I and III, it is only permitted if ECB is raised from foreign equity holder.
Answer: No. Equity investment either directly or indirectly (through purchase of goodwill) is not permitted.
Answer: No, it is not permitted under any track.
Answer: Refinancing of Rupee denominated ECB with Foreign Currency denominated ECB under Track II is not permitted.
Answer: ECB proceeds can be utilized for overseas investment as permitted under the overseas investment guidelines.
Answer: No, the repayment of ECB raised under USD 10 billion scheme is to be undertaken through forex revenues.
Answer: Yes, provided that company continues to be eligible to raise ECB under the extant ECB framework, all-in-cost is lower of the all-in-cost of existing ECB or as applicable to the respective track under the extant framework and residual maturity is not reduced.
Answer: Yes, however, the all-in-cost should be lower of the all-in-cost of existing ECB or 6 month LIBOR+450 bps per annum. Further, the entity should be eligible to raise ECB under Track I and residual maturity should not reduce.
Answer: No. Such ECBs will be exempt from the mandatory hedging clause, however, they are encouraged to undertake hedging for the open currency risk exposure.
Answer: Yes, if the original ECB raised under Track III is to be refinanced with another ECB under Track III. However, when refinancing of existing foreign currency denominated ECB (Track I/ II) is done by raising Rupee denominated ECB (Track III), the condition regarding lower all-in-cost of the fresh ECB will not apply.
Answer: Yes, but only in cases where the overseas guarantor fulfills the criteria of recognised lender under extant ECB guidelines. Fees payable, if any, for this guarantee will form part of All-in-cost of the ECB.
Answer: An overseas bank (not overseas branches / subsidiaries of Indian bank) is permitted to give guarantee from overseas for ECB, provided it is recognised as ECB lender as per extant ECB guidelines. It may be noted that guarantee fee will form part of all-in-cost of the ECB.
Answer: Wherever 100 percent hedging has been mandated by the RBI, ECB borrowers shall keep their ECB exposure hedged 100 per cent at all times, which would be verified by the Authorised Dealer Category-I bank concerned and reported to RBI through ECB 2 returns. Besides, the ECB borrower shall also have a board approved risk management policy for the ECBs.
Answer: Wherever hedging has been mandated by the RBI, the following should be ensured:
- Coverage: The ECB borrower will be required to fully cover principal as well as coupon through financial hedges. The financial hedge for all exposures on account of ECB should start from the time of each such exposure (i.e. the day liability is created in the books of the borrower).
- Tenor and rollover: A minimum tenor of one year of financial hedge would be required with periodic rollover duly ensuring that the exposure on account of ECB is not unhedged / underhedged at any point during the currency of ECB.
iii. Natural Hedge: Natural hedge, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows / revenues in matching currency, net of all other projected outflows. For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. Any other arrangements/ structures, where revenues are indexed to foreign currency will not be considered as natural hedge.
Answer: Hedging for ECB purposes means hedging currency risk through products as permitted under Master Direction on Risk Management and Inter-bank dealings. Use of any cost reduction structure for hedging of ECB, which does not fully cover the foreign exchange risk currency risk associated with ECB any time during the currency of the borrowing, is not permitted.
Answer: An entity which is raising foreign currency denominated ECB is also required to follow the guidelines for hedging issued, if any, by the respective sector / prudential regulator in respect of foreign currency exposure.
Answer: Any draw-down in respect of an ECB as well as payment of any fees / charges for raising an ECB should happen only after obtaining the Loan Registration Number (LRN) from RBI by filing duly certified Form 83 to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051 (Contact numbers 022-26572513 and 022-26573612). It should be ensured that all terms and conditions of the ECB are reported correctly in Form 83 and none of the columns are left blank (such columns which are not applicable for the borrowing or against which ‘nil’ information has to be given, should be suitably covered). Changes in ECB parameters, whether under the automatic route with the approval of Authorised Dealer Category –I banks or under the approval route with prior approval of the RBI, should also be reported to the DSIM through revised Form 83 at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form 83, the changes should be specifically mentioned in the communication. Any failure to comply with reporting guidelines in respect of Form 83 for an ECB may invite penal action under FEMA.
Answer: The borrowers are required to report actual ECB transactions, correctly and fully, through duly certified ECB 2 Return through the Authorised Dealer Category-I bank to DSIM as per the periodicity specified by the RBI. None of the columns in ECB 2 Return should be left blank (such columns which are not applicable for the borrowing or against which ‘nil’ information has to be given, should be suitably covered). The ECB 2 Return should reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in ECB 2 Return suitably. Any failure to comply with reporting guidelines in respect of ECB 2 Return, including failure to adhere to periodicity of reporting, may invite penal action under FEMA.
Answer: No, in case no changes are made in terms and conditions of ECB, there is no need to file revised Form 83.
Answer: Indian banks are not permitted to raise ECB. They can act as ECB lenders (through their overseas branches / subsidiaries) only under Track I of the ECB framework duly ensuring that the applicable prudential norms are complied with. Overseas branches/subsidiaries of Indian banks are permitted only to refinance ECBs of highly rated (AAA) corporates (or equivalent AAA(SO) rating) as well as Navratna and Maharatna PSUs, provided the outstanding maturity of the original borrowing is not reduced and all-in-cost of fresh ECB is lower than the existing ECB. Partial refinancing is also permitted subject to same conditions. Further, any case involving repayment/refinancing of any foreign currency loan by way of rupee loans from Indian banks, prudential guidelines stipulated in paragraph 4(b) of Circular No. BP.BC.85/21.04.048/2014-15 dated April 06, 2015 issued by the Department of Banking Regulation (DBR) of RBI will be applicable which interalia state that such refinance shall be treated as ‘restructuring’ (and classified/provided for as per extant prudential norms on income recognition, asset classification and provisioning), if the above is extended to a borrower who is under financial difficulty and involve concessions that the bank would otherwise not consider. It should also be noted that if the ECB borrower concerned has availed credit facilities from the Indian banking system including overseas branches/subsidiaries, any extension of tenure / change in average maturity period of ECB / change in all-in-cost of ECB/ conversion of unpaid ECBs into equity (whether matured or not) shall be subject to applicable prudential guidelines issued by the DBR of RBI, including guidelines on restructuring, as applicable. Further, such conversion of ECB into equity shall also be subject to consent of other lenders, if any, to the same borrower or at least information regarding conversions shall be exchanged with other lenders of the borrower.
Answer: The designated Authorized Dealer Category-I bank, which is the bank branch designated by the ECB borrower, would be primarily responsible for meeting the reporting requirements including obtaining of LRN, exercising the delegated powers under these guidelines and monitoring of ECB transactions.
Answer: No, Trade Credits, including Buyers’ Credit, can be availed as a form of clean credit apart from availing Bank Guarantee for Trade Credits, subject to extant Trade Credit guidelines and compliance with provisions contained in Department of Banking Regulation Master Circular No.DBR No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time. Letters of Credit/ Bank Guarantee arrangements continue as a form of trade finance, as hitherto.
Answer: No, LoUs/ LoCs issued and accepted prior to the issuance of the said circular may continue till their original validity. However, no roll-over is permitted.
Answer: AD banks can issue SBLC on behalf of their customers for availing short term trade credit from overseas lenders in foreign currency subject to such SBLCs complying with the provisions contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.