FEMA updates from 19th August 2013 to 04th October 2013

Foreign Investments in Asset Reconstruction Companies (ARC)

Previously.

 (a) Foreign Direct Investment (FDI) upto 49% in the equity capital of Asset Reconstruction Companies (ARCs) was permitted subject to certain conditions. However, investment by Foreign Institutional Investors (FIIs) in the equity capital of ARCs was not permitted; and

(b) general permission was granted to Foreign Institutional Investors (FIIs) to invest in Security Receipts (SRs) upto 49 per cent of each tranche of scheme of Security Receipts subject to condition that investment of a single FII in each tranche of scheme of SRs shall not exceed 10 per cent of the issue.

. A review of the policy was undertaken and it has been decided as under:

        i.            The ceiling for FDI in ARCs has been increased from 49% to 74% subject to the condition that no sponsor may hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII. The foreign investment in ARCs would need to comply with the FDI policy in terms of entry route conditionality and sectoral caps.

      ii.            The foreign investment limit of 74% in ARC would be a combined limit of FDI and FII. Hence, the prohibition on investment by FII in ARCs will be removed. The total shareholding of an individual FII shall not exceed 10% of the total paid-up capital.

    iii.            The limit of FII investment in SRs may be enhanced from 49% to 74% of the paid up value of each tranche of scheme of Security Receipts issued by the Asset Reconstruction Companies. Further, the individual limit of 10% for investment of a single FII in each tranche of SRs issued by ARCs may be dispensed with. Such investment should be within the FII limit on corporate bonds prescribed from time to time, and sectoral caps under the extant FDI Regulations should be complied with.

Investments by Non-resident Indians (NRIs) under Portfolio Investment Scheme (PIS) Liberalization of Policy

As per the Schedule 3 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000

NRIs can invest under PIS on repatriation and/or non-repatriation basis in shares and convertible debentures of listed Indian companies on a recognized stock exchange in India through a registered stock broker. Further, NRIs may purchase and sell shares/convertible debentures under the PIS through a branch designated by an Authorized Dealer for the purpose and duly approved by the Reserve Bank of India.

Now it has been decided to liberalize further

i) allot Unique Code number only to Link office of the AD Category - I bank; and

ii) dispense with the allotment of Unique Code number to each branch designated by that AD Category - I bank administering the Scheme. Accordingly, henceforth in accordance with the policy approved by the Board, AD Category - I bank shall be free to permit its branches to administer the Portfolio Investment Scheme for NRIs subject to the following:

a) the AD Category - I bank while granting permission to NRI for investment under PIS shall allow them to operate the scheme as per the terms and conditions prescribed

b) the designated link office shall continue to report on a daily basis PIS transactions undertaken on behalf of NRIs for their entire bank to the Reserve Bank under the Online Report Filing System (ORFS) in form LEC (NRI) as per present practice in vogue web site (https://secweb.rbi.org.in/ORFSMainWeb/Login.jsp).;

c) the AD Category - I bank shall provide to the Reserve Bank the complete contact details of such link office in advance before commencing operations;

d) the AD Category - I bank shall sensitise the branches administering the Scheme to ensure that NRIs are not allowed to invest in any Indian company which is engaged or proposes to engage in the business of chit fund, Nidhi company, agricultural or plantation activities, real estate business (does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships), construction of farm houses, manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes and trading in Transferable Development Rights (TDRs) and in sectors/ activities as specified in terms of Notification No. FEMA.1/2000-RB dated May 3, 2000, as amended from time to time; and

e) ensure compliance with instructions issued through A.D.(M.A. Series) Circulars, EC.CO.FID circulars A.D (M.A. Series) Circular no 27 and the regulatory requirements under FEMA, 1999. It may be noted that Overseas Corporate Bodies( OCBs) have been derecognized as an eligible ‘class of investor’ under various routes/scheme available under the extant Foreign Exchange Management Regulations in terms of the Foreign Exchange Management [withdrawal of General Permission to Overseas Corporate Bodies( OCBs)] Regulations, 2003 notified vide Notification No. FEMA.101/2003-RB dated October 3, 2003.

Overseas Direct Investments – Rationalization/Clarifications

All the financial commitments made on or before August 14, 2013, in compliance with the earlier limit of 400% of the net worth of the Indian Party under the automatic route will continue to be allowed. In other words, such investments shall not be subject to any unwinding or approval from the Reserve Bank.

 Attention of Authorized Dealer Category - I (AD Category - I) banks is also invited to the provisions under Regulation 6 of the Notification ibid, in terms of which the limit of financial commitments for an Indian Party (presently 100% of its net worth) shall not apply to the financial commitments funded out of EEFC account of the Indian Party or out of funds raised by way of ADRs / GDRs by the Indian Party, as hitherto.

the limit of 400% of the net worth of the Indian Party for the financial commitments funded by way of eligible External Commercial Borrowing (ECB) raised by the Indian Party as per the extant ECB guidelines issued by the Reserve Bank of India from time to time is retained still.

External Commercial Borrowings (ECB) from the foreign equity holder

 As per the extant ECB policy, borrowings in the form of ECB cannot be utilized for general corporate purpose.

On a review, it has been decided to permit eligible borrowers to avail of ECB under the approval route from their foreign equity holder company with minimum average maturity of 7 years for general corporate purposes subject to the following conditions:

        i.            Minimum paid-up equity of 25 per cent should be held directly by the lender;

      ii.            Such ECBs would not be used for any purpose not permitted under extant the ECB guidelines (including on-lending to their group companies / step-down subsidiaries in India); and

    iii.            Repayment of the principal shall commence only after completion of minimum average maturity of 7 years. No prepayment will be allowed before maturity.

 The above modifications to the ECB guidelines will come into force with immediate effect. All other aspects of extant ECB guidelines remain unchanged.

Issue of Bank Guarantee on behalf of person resident outside India for FDI transactions

AD Category – I banks are permitted to open Escrow account and Special account on behalf of non-resident acquirer for acquisition/transfer of shares/convertible debentures of an Indian company through open offers/ delisting/ exit offers, subject to compliance with the relevant SEBI [Substantial Acquisition of Shares and Takeovers (SAST)] Regulations, 1997, as amended from time to time and other applicable SEBI Regulations and subject to terms and conditions of FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 read with FEM(Deposit) Regulations andAD Category-I banks are allowed to give guarantees for specified purposes as stated in Foreign Exchange Management (Guarantee) Regulations.

In order to provide operational flexibility and ease the procedures now the  AD Category –I bank are permitted to issue bank guarantee, without prior approval of the Reserve Bank, on behalf of a non-resident acquiring shares or convertible debentures of an Indian company through open offers/ delisting/exit offers, provided :

a) the transaction is in compliance with the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) [SEBI(SAST)] Regulations;

b) the guarantee given by the AD Category –I bank is covered by a counter guarantee of a bank of international repute.

It may be noted that the guarantee shall be valid for a tenure co-terminus with the offer period as required under the SEBI (SAST) Regulations.. In case of invocation of the guarantee, the AD Category-I bank is required to submit to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai 400 001, a report on the circumstances leading to the invocation of the guarantee.

Purchase of shares on the recognised stock exchanges in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations

Currently, Foreign Institutional Investors (FII), Qualified Foreign Investors (QFI) and Non Resident Indians (NRI) are eligible to acquire shares on the recognised stock exchanges in compliance with the conditions under Schedule 3, 4, 5 and 8 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 ,A non-resident is not permitted to acquire shares on stock exchange under FDI scheme under the said notification.

 The issue of acquisition of shares under the FDI Scheme by a non-resident on a recognised stock exchange has been reviewed and as a further measure of liberalization, it has been decided that a Non resident including a Non Resident Indian may acquire shares of a listed Indian company on the stock exchange through a registered broker under FDI scheme provided that:

i. The non-resident investor has already acquired and continues to hold the control in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations;

ii. The amount of consideration for transfer of shares to non-resident consequent to purchase on the stock exchange may be paid as below:

1. by way of inward remittance through normal banking channels, or
2. by way of debit to the NRE/FCNR account of the person concerned maintained with an authorised dealer/bank;
3. by debit to non-interest bearing Escrow account (in Indian Rupees) maintained in India with the AD bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2000;
4. the consideration amount may also be paid out of the dividend payable by Indian investee company, in which the said non-resident holds control as (i) above, provided the right to receive dividend is established and the dividend amount has been credited to specially designated non –interest bearing rupee account for acquisition of shares on the floor of stock exchange.

iii. The pricing for subsequent transfer of shares to non-resident shareholder shall be in accordance with the pricing guidelines under FEMA;

iv. The original and resultant investments are in line with the extant FDI policy and FEMA regulations in respect of sectoral cap, entry route, reporting requirement, documentation, etc;

Export and Import of Currency

As per Regulation (2) of Foreign Exchange Management (Export and Import of Currency) (Amendment) Regulations, 2009, in terms of which, any person resident in India may take outside India or having gone out of India on a temporary visit, may bring into India (other than to and from Nepal and Bhutan) currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs.7,500 per person.

Now the limit enhanced to Rs. 10,000 per person.

Accordingly, any person resident in India:

i) may take outside India (other than to Nepal and Bhutan) currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs.10,000 (Rupees ten thousand only) per person; and

ii) who had gone out of India on a temporary visit, may bring into India at the time of his return from any place outside India (other than from Nepal and Bhutan), currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs.10,000 (Rupees ten thousand only) per person.

Overseas Direct Investment – Amendment

Overseas Direct Investment – Liberalization / Rationalization providing Corporate Guarantee for the Step down Subsidiary which reads as under:

Previously, issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian holding company directly or indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued.

This has been amended as follows

The issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued.

Foreign Investment in India – Guidelines for calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies and downstream investment by Indian companies

Downstream investments by an Indian company which is not owned and/or controlled by resident entity/ties.

“For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not use funds borrowed in the domestic market. This would, however, not preclude downstream operating companies, from raising debt in the domestic market. Downstream investments through internal accruals are permissible by an Indian company, subject to the provisions of conditions stipulated in the Guidelines for calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies and downstream investment by Indian companies as per A.P.DIR (Circular) No.1 dated July 04, 2013.

Export of Goods and Services- Simplification and Revision of Declaration Form for Exports of Goods/Software

As per the existing provisions every exporter of goods or softwares has to give declaration in one of the forms (GR/PP/SDF/SOFTEX/Bulk SOFTEX) and submit it to the specified authority for certification.

In order to simplify the existing form used for declaration of exports of Goods/Softwares, a common form called “Export Declaration Form” (EDF) has been devised to declare all types of export of goods from Non-EDI ports and a common “SOFTEX Form” to declare single as well as bulk software exports.

The EDF will replace the existing GR/PP form used for declaration of export of Goods. The procedure relating to the exports of goods through EDI ports will remain the same and SDF form will be applicable as hitherto.

Under the revised procedure, the exporters will have to declare all the export transactions, including those less than US$25000, in the form as applicable.

. The Foreign Exchange Management Act (FEMA) requires exporters to complete the EDF/SOFTEX Form using the number so allotted and submit them to the specified authority first for certification and then to AD for necessary action as hitherto.

The above instruction will come into force from October 1, 2013.

Foreign Direct Investment (FDI) in India – Review of FDI policy – definition for  control and sector specific conditions

The definition of the term “Control” under the Foreign Investment in India – Guidelines for calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies and downstream investment by Indian companies has been modified as follows.

'Control' shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

Government of Himachal Pradesh and Karnataka have given consent to implement the FDI policy on Multi Brand Retail Trading in Himachal Pradesh and Karnataka respectively. As such, the list of States/Union Territories which have conveyed their concurrence stands modified.

External Commercial Borrowings (ECB) Policy – Liberalisation of definition of Infrastructure Sector

The definition or infrastructure sector for the purpose of availing ECB has been modified ,taking into account the Harmonised Master List of Infrastructure sub-sectors and Institutional Mechanism for its updation approved by Government of India vide Notification F. No. 13/06/2009-INF dated March 27, 2012.

The expanded infrastructure sector and sub-sectors for the purpose of ECB include:

(a) Energy which will include (i) electricity generation, (ii) electricity transmission, (iii) electricity distribution, (iv) oil pipelines, (v) oil/gas/liquefied natural gas (LNG) storage facility (includes strategic storage of crude oil) and (vi) gas pipelines (includes city gas distribution network);

(b) Communication which will include (i) mobile telephony services / companies providing cellular services, (ii) fixed network telecommunication (includes optic fibre / cable networks which provide broadband / internet) and (iii) telecommunication towers;
(c) Transport which will include (i) railways (railway track, tunnel, viaduct, bridges and includes supporting terminal infrastructure such as loading / unloading terminals, stations and buildings), (ii) roads and bridges, (iii) ports, (iv) inland waterways, (v) airport and (vi) urban public transport (except rolling stock in case of urban road transport);

(d) Water and sanitation which will include (i) water supply pipelines, (ii) solid waste management, (iii) water treatment plants, (iv) sewage projects (sewage collection, treatment and disposal system), (v) irrigation (dams, channels, embankments, etc.) and (vi) storm water drainage system;

(e) (i) mining, (ii) exploration and (iii) refining;

(f) Social and commercial infrastructure which will include (i) hospitals (capital stock and includes medical colleges and para medical training institutes), (ii) Hotel Sector which will include hotels with fixed capital investment of Rs. 200 crore and above, convention centres with fixed capital investment of Rs. 300 crore and above and three star or higher category classified hotels located outside cities with population of more than 1 million (fixed capital investment is excluding of land value), (iii) common infrastructure for industrial parks, SEZs, tourism facilities, (iv) fertilizer (capital investment), (v) post harvest storage infrastructure for agriculture and horticulture produce including cold storage, (vi) soil testing laboratories and (vii) cold chain (includes cold room facility for farm level pre-cooling, for preservation or storage or agriculture and allied produce, marine products and meat.

Opening of Trading Office / Non-Trading Office / Branch Office/ Representative Office abroad

Since April 20,2002 as per A.P. (DIR Series) Circular No. 39  ,a statement in Form ORA (Offices & Representatives Abroad) was to be submitted to the Regional Offices of Reserve Bank on half yearly basis instead of on a monthly basis by the Authorized Dealers when an Indian party opens  a Trading office /Non Trading Office Branch Office/ Representative Office abroad.

Now the practice of forwarding the statement in Form ORA to the respective Regional Office of Reserve Bank by the Authorized Dealers has been discontinued. Authorized Dealers may, however, continue to maintain the particulars of approvals granted for opening of Trading Office / Non-Trading Office / Branch Office/ Representative Office at their end.

Trade Credits for Import into India

As per the extant guidelines, AD Category - I banks may approve availing of trade credit not exceeding USD 20 million up to a maximum period of five years (from the date of shipment) for companies in the infrastructure sector, subject to certain terms and condition.

previously the AD Category - I banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years. No roll-over/extension is permitted beyond the permissible period.

Now, companies in all sectors are allowed to avail of trade credit not exceeding USD 20 million up to a maximum period of five years for import of capital goods as classified by Director General of Foreign Trade (DGFT). It has also been decided to relax the ab-initio contract period of 15 (fifteen) months for all trade credits to 6 (six) months.

AD Category - I banks are, however, not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years.

External Commercial Borrowings (ECB) Policy – ECB proceeds for acquisition of shares under the Government’s disinvestment programme of PSUs - Clarification

ECB proceeds is permitted to be used in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of the public sector undertakings (PSUs) shares.

Now that the ECB is allowed for all subsequent stages of acquisition of shares in the disinvestment process under the Government’s disinvestment programme of the PSU shares; in other words, facility of ECB is available for multiple rounds of disinvestment of PSU shares under the Government disinvestment programme.

External Commercial Borrowings (ECB) Policy –Refinancing / Rescheduling of ECB

As per the extant ECB guidelines, the eligible borrowers desirous of refinancing an existing ECB can raise fresh ECB at a higher all-in-cost / reschedule an existing ECB at a higher all-in-cost under the approval route subject to the condition that the enhanced all-in-cost does not exceed the all-in-cost ceiling prescribed as per extant guidelines.

Now it has been decided to discontinue this facility allowing eligible borrowers to raise ECB at a higher all-in-cost to refinance / reschedule an existing ECB with effect from October 01, 2013.

The scheme of refinance of existing ECB by raising fresh ECB at lower all-in-cost, subject to the condition that the outstanding maturity of the original ECB is either maintained or extended, will continue as hitherto under the automatic route and approval route as the case may be.