Liberalisation of opening/holding/maintaining Foreign Currency Accounts

The RBI vide A. P. (DIR Series) Circular No.101 dated 02.04.2012 liberalised the regulations pertaining to opening / holding /maintaining the Foreign Currency Account by Indian party outside India.

As per the extant provisions of FEMA, an Indian party (as defined under Notification No. FEMA 120/RB-2004 dated July 07, 2004, as amended from time to time) is required to obtain prior permission of the Reserve Bank to open, hold and maintain Foreign Currency Account in a foreign country for the purpose of overseas direct investments in that country, in case the regulation of the host country requires that the investment in the country is to be made through a particular account to be opened with the commercial bank of the country.

An Indian party will now be allowed to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments subject to the following terms and conditions:

1.  An Indian party shall be eligible for overseas Direct Investment as per the regulations of FEMA.

2.  The host country Regulations stipulate that the investments into the country is required to be routed through a designated account.

3.  FCA shall be opened, held and maintained as per the regulation of the host country.

4.  The remittances sent to the FCA by the Indian party should be utilized only for making overseas direct investment into the JV / WOS abroad.

5.  Any amount received in the account by way of dividend and / or other entitlements from the subsidiary shall be repatriated to India within 30 days from the date of credit.

6.  The Indian party should submit the details of debits and credits in the FCA on yearly basis to the designated AD  bank with a certificate from the Statutory Auditors of the Indian  party certifying that the FCA was maintained as per the host country laws and the extant FEMA regulations / provisions as applicable.

7.  The FCA so opened shall be closed immediately or within 30 days from the date of disinvestment from JV / WOS or cessation thereof

Waiver of requirement of submission of annual statement by banks on use of debit cards by resident Indians while on a visit outside India.

In terms of notification A.P. (DIR Series) Circular No.46 dated June 14, 2005 all the banks authorized to deal in foreign exchange are required to submit a statement as on 31^st December of every year in case aggregate forex utilization by international  debit card holders exceeds $ 1,00,000 in a calendar year.

Now Reserve Bank of India has issued a new notification No. A.P. (DIR Series) Circular No.29 dated 22^nd December, 2010 in which RBI has advised all the banks authorized to deal in foreign exchange to discontinue the submission of above said statements from the calendar year 2010.

All other instructions of A.P. (DIR Series) Circular No.46 dated June 14, 2005 shall continue to remain the same.

Overseas Direct Investment in Joint Ventures and Wholly-owned subsidiaries

Overseas direct investment is fall under Capital account transaction specified under sec.6 of the FEMA, 1999. Indian parties are prohibited from making investment in foreign entities engaged in real estate (excluding development of township, construction of residential/commercial premises, road or bridges) or banking business with out  prior permission of the RBI. General permission granted to for purchase/acquisition of securities out of funds in RFC a/c, as bonus shares or when not permanently resident in India, out of foreign currency resources outside India. General permission is also available to sell the shares so acquired.

Automatic Route:

1.    Indian party is permitted to invest in overseas JV/WOS to the extent not exceeding 400% of net worth of Indian Party. India party includes Company; body incorporated under the Act of Parliament & Firm registered under the partnership Act, 1932 but excludes individuals.

2.    This ceiling (400%) will not be applicable when investment is made out of EEFC A/c. The Indian party has to approach AD category I bank with Form ODI with necessary enclosures for effecting remittances towards investment.

3.    The above said ceiling will include contribution to Capital, granting of loans and 100% guarantees issued to or on behalf of JV/WOS. The investments are subject following conditions:

a.          The Indian party may extend loan / guarantee only ot an overseas enterprise in which it has equity participation. Guarantee may be corporate / personal, primary / collateral, by promoter company/ group company/sister concern or associate company in India provided that –

                     i.      All financial commitments including guarantee should not exceed 400 % of net worth as per latest audited balance sheet.

                   ii.      No guarantee should be open ended i.e. the amount and period of the guarantee should be specified upfront.

                  iii.      In case of corporate guarantees, all guarantees should be reported to RBI in Form ODI part II and guarantees should be within the prudential norms issued by RBI from time to time.

Note: Specific approval of the RBI is required for creating charge on immovable property and pledge of shares of the Indian parent/group companies in favour of non-resident entity.

b.         The Indian party should not be in RBI exporters Caution list / List of defaulters circulated by RBI/CIBIL/ or any other regulatory agency.

c.          All transactions should be routed through the branch of AD Bank to be designated by Indian Party.

d.         Where investment is more than USD 5 million, valuation of shares shall be made by Category I Merchant Banker registered with SEBI/an Investment Banker/Merchant banker registered with appropriate regulatory authority of the host country. In all other cases by a CA or CPA.

e.         In case of swap of shares, irrespective of the amount, valuation of shares shall be made by Category I Merchant Banker registered with SEBI/an Investment Banker registered with appropriate regulatory authority of the host country and approval of FIPB is pre-requisite.

f.           In case of investment by Registered Partnership firms, individual partners may hold shares for & on behalf of the firm if the regulations of the host country warrant such holding.

g.          An Indian party may acquire shares of foreign company engaged in the bonafied business activity in exchange of ADR/GDR in accordance to the FCCB scheme and Guidelines of Govt. of India.

4      Form ODI has to be filed through AD Bank within 30 days of transaction.

5      Investment through Special Purpose Vehicle (SPV) is permitted through automatic route provided Indian party is not RBI’s caution list/List of defaulters or under investigation by Directorate of Enforcement.

Investment in unincorporated entities overseas under automatic route: 

1.          Investment in unincorporated entity in oil sector by Navaratna PSU, ONGC, Oil India Ltd may be permitted by AD Category I Bank without any limit subject to the approval by competent authority.

2.          Other companies can invest in oil sector up to 400% of net worth under automatic route subject to the approval fo the competent authority. In excess of above said limit attracts prior approval of the RBI.

3.          Indian companies are also permitted to participate in consortium with other international operators to construct & maintain sub-marine cable system on co-ownership basis under automatic route provided it has obtained necessary license from the Dept. of Telecom to establish, install, operate & maintain International Long Distance Services.

Method of Funding:

a.       Drawal of Foreign exchange from AD Bank in India

b.      Capitalisation of exports

c.       Swap of shares

d.      Proceeds of ECB/FCCB

e.       In exchange of ADR/GDR (as per scheme & guidelines) – (ceiling of 400% not applicable)

f.          Balance held in EEFC accountproceeds of funds raised through ADR/GDR – (ceiling of 400% not applicable)

General permission is granted for acquisition of shares in the following manner –

-          Out of funds held in RFC a/c

-          As bonus shares

-          When not permanently resident in India, out of foreign currency resources outside India.

Capitalisation of exports:

a.       Capitalization of exports, fees, royalties or other dues for supply of technical knowhow, consultancy, managerial & other services is permitted within the ceiling limit. Capitalization of export proceeds remaining unrealized beyond the prescribed period of realization will require the prior approval of the RBI.

b.      Software companies are permitted to receive 25% of value of export to an overseas start-up company in the form of shares with entering into JV agreements, with the prior approval of the RBI.

Investment in Financial sector:

Indian company which engaged in financial sector can invest in entity outside India provided –

-          It has registered with regulatory authority in India

-          Has earned a net profit in 3 financial years from financial activity

-          Has obtained approvals form regulatory authorities in India & abroad

-          Has fulfilled the capital adequacy prudential norms prescribed the regulatory authorities in India

Other Invcestments:

Listed Indian companies may invest upto 50% of net worth as per latest audited balance sheet in shares & bonds/fixed income securities rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companies.

Mutual Finds registered with SEBI can invest within the overall cap of USD 7 million in ADR/GDR, equity of listed overseas entity, initial or follow of offering of listed oveaseas entity, foreign debt securities, Govt. securities, short term deposites and money market instruments rated not below investment grade etc.

Domestic venture capital funds registered with SEBI may invest in equity or equity linked instruments of off-shore venture capital undertaking, subject to the overall limit of USD 500 million.

Overseas investment by proprietorship concern:

Proprietorship concerns and unregistered partnership firms are allowed to set up JV/WOS with the prior approval of the RBI subject to satisfying certain eligibility criteria. Such investments aresubject following conditions:

a.       The Partnership/proprietorship firm is a DGFT recognized Star Export House.

b.      Exporter has proven track record i.e overdue exports does not exceed 10% of average export realization of preceeding 3 financial years.

c.       Exporter not coming under RBI’s caution list/list of defaulter/adverse notice by Directorate Enforcement.

d.      Amount of investment does not exceed 10% of average export realization in 3 financial year or 2005 of net owned funds, whichever is lower.

Obligations of Indian party:

An Indian party made which has made direct investment abroad is under obligation to –

a.       Receive share certificate or other document as an evident of investment

b.      Repatriate to India the dues receivable from foreign entity

c.       Submit the documents/Annual performance report to RBI in accordance with the provisions of Regulation 15 of the Notification.

Transfer by way of sale of shares of JV/WOS:

Indian parties may also disinvest without prior approval of the RBI, in any of the under noted categories:

-          JV/WOS is listed in overseas stock exchange

-          Indian listed promoted company is listed in Indian stock exchange and its net worth is of not less than Rs.100 crore and

-          Where Indian Promoter Company is unlisted, investment in overseas venture   does not exceed USD 10 million.

The disinvestment is subject to following conditions –

a.       The sale does not result in any write-off of the investment made

b.      The sale is effected through stock exchange where shares of the JV/WOS is listed

c.       If shares are not listed and disinvestment is through private arrangement, sale price shall not be less than the value certified by a CA/CPA as the fair value of the shares of JV/WOS based on latest audited balance sheet.

d.      The Indian party does not have any outstanding dues by way of dividend, technical know-how fee, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV/WOS.

e.      The overseas concern is in operation for at least one full year and Annual performance report along with audited accounts for that year has been submitted to RBI.

f.        The Indian party is not under investigation by CBI/DoE/SEBI/IRDA or any other regulatory authority in India.

An Indian party which does not comply any of the above mentioned conditions, should obtain prior approval of the RBI.

The details of disinvestment should be filed with RBI through AD Category I bank within 30 days of disinvestment.

OTHER INVESTMENTS IN FOREIGN SECURITIES:

General permission has been granted to a person resident in India who is an individual –

-          Acquisition by way of gift from person resident outside India

-          Acquisition under cashless ESOP scheme by a company outside India.

-          Acquisition by way of inheritance

-          Acquisition of shares offered by a foreign company under ESOP scheme, if he is an employee/director of Indian office/branch of a foreign company or subsidiary in india of a foreign company or an Indian company in which foreign holding, either direct or through holding company /SPV, is not less than 51%.

A person resident in India may transfer by way of sale the shares acquired as stated above provided that the proceeds thereof are repatriated immediately on receipt thereof and in case not later than 90 days of sale of such securities.

Foreign companies are permitted to repurchase the shares issued under ESOP scheme provided shares were issued under rules/regulations of FEMA, 1999 and shares are repurchased in terms of initial offer document and Annual return submitted through AD Category I bank.

General Permission in certain case:

Residents are permitted to acquire a foreign security, if it represents –

a.       Qualification shares provided it should not exceed 1% of paid up capital of the overseas company and consideration for the same shall not exceed USD 20,000 in a calendar year.

b.      Right shares in accordance with the provisions of the law for the time being in force.

c.       Purchase of shares of JV/WOS of the Indian promoter company engaged in software field, by its employees/directors, where consideration does not exceed USD 5,000 or equivalent per employee in a block of 5 years; the shares so acquired shall not exceed 5% of paid-up capital of JV/WOS and the % of shares held by the promoter along with the shares acquired by the employees is not less than the % of shares held by the promoter company prior to such allotment.

d.      Purchase of securities under ADR/GDR schemes by the resident employees of the Indian company in knowledge based sectors, including working directors provided purchase consideration does not exceed USD 50,000 or its equivalent in a block of 5 years.

Foreign Direct Investment

Foreign Direct Investment (FDI) may be either through Automatic Route or Approval route (with prior approval of FIPB).

If the investor has existing venture or tie-up in India as on 12.01.2005, through investment/ Technical collaboration/ Trademark Agreement in the same field in which the Indian Company, whose share are being  issued, is engaged, he has to obtain the prior permission of the SIA/FIPB to acquire the shares. This restriction is, however not applicable to:

1.       The issue of shares for investments to be made by Venture Capital Funds registered with SEBI.

2.       Investments by multinational financial institutions

3.       Where in existing Joint ventures, investments by either of the parties is less than 3%

4.       Where existing JV / collaboration is defunct or sick

5.       Issue of shares of Indian company engaged in IT or mining sector, if JV/Technical collaboration/ Trademark agreement of the person to whom the shares has to be issued are also in the same IT or mining sector for the same area or mineral.

Eligibility for Investment:

1.       A person resident outside India (other than citizen of Pakistan)

2.       Entity incorporated outside India (other than those incorporated in Pakistan)

3.       Person / Entity incorporated in Bangladesh can invest with the prior approval of the FIPB

Type of Instruments:

1.       Equity, fully and mandatorily convertible debentures and fully & mandatorily convertible preference shares subject to the pricing guidelines of FEMA.

2.       Other types of preference shares in accordance with ECB guidelines. Since these instruments are denominated in Rupees, interest rates will be based on the swap equivalent to LIBOR + spead permissible to ECB for the corresponding maturity.

Investment in Micro & Small Enterprise (MSE) :

A company reckoned as MSE in terms of MSMED Act, 2006, including EOU, FTZ,EPZ, STP or EHTP, which is not engaged in any activity specified in Annex 1 to the Master circularcan issue shares or convertible debentures to the eligible persons subject to the limit under FDI policy.

An Industrial undertaking (other than MSE) having industrial licence under IDRA Act, 1951 for manufacturing items reserved for MSE may issue shares to the eligible persons to the extent of 24% of the paid up capital under Automatic Route.

Investment in Public Sector Banks:

FDI & Portfolio investment in nationalized banks are subject to overall statutory limit of 20% as provided under Sec. 3(2D) of the Banking Companies (Acquisition & Transfer of undertakings) Acts 1970/80.

Investments from Bhutan & Nepal:

NRI, residents as well as citizens of Nepal & Bhutan are permitted to invest under FDI scheme provided consideration for the investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

Right / Bonus issue:

FEMA provisions allow the right / bonus issue to non-residents subject to sectoral cap and compliance with other status such as Companies Act, SEBI rules etc. Prices offered to non-residents on right basis shall be:

1.       In case of listed company, at prices as determined by the company

2.       In case of unlisted company, at price not less than the price offered to resident shareholders.

Additional allotment in addition to the right can be made out of unsubscribed portion subject to sectoral cap.

Acquisition of shares under the scheme of  Merger / Amalgamation:

In case of Merger / Amalgamation, transferee / new company is allowed to issue shares to the shareholders of transferor company subject to sectoral cap and transferor/transferee/new company is not engaged in activities prohibited under FDI policy.

Issue of shares under ESOP:

1.       List Company can issue shares under ESOP to its employees to employees of JV/WOS abroad who are resident outside India, directly or through trust as per SEBI regulations and face value of the shares allotted to non-resident employees does not exceed 5% of paid up capital.

2.       Unlisted company has to comply with the provisions of the Companies Act.

3.       The issuing company has to submit details of issue within 30 days from the date of issue to the regional office of the RBI.

Reporting of FDI:

An Indian company receiving the investment from outside India under FDI, should report the details of consideration to regional office of the RBI through AD category I bank within 30 days from the date of receipt of amount of consideration together with FIRC copyand KYC report. The report would be acknowledged by the regional office concerned, which will allot Unique Identification Number.

Issue of Shares:

The equity instruments should be issued within 180 days from the date of receipt of inward remittance or by debit to NRE / FCNR (B) account of the non-resident investor. If not issued within the due date, entire amount should be refunded through outward remittance through normal banking channels or by credit to NRE / FCNR (B) account. In exceptional case, RBI may on merit basis, permit to issue shares after 180 days from the date of receipt of inward remittance.

Reporting of Issue:

Within 30 days from the date of issue, FC-GPR Part A (along with CS certificate & Merchant banker category I/CA certificate regarding manner of arriving the price of share)has to be filed with RBI through AD category I bank.

Issue Price:

Price of shares allotted to persons resident outside India under FDI scheme shall be on the basis of SEBI guidelines for listed companies. In case of unlisted companies, valuation of shares has to done by SEBI registered category I Merchant Banker or Chartered Accountant as per Discounted Cash Flow method (DCF). In case of issue of shares on preferential allotment the price shall not be less that the price as applicable to transfer of shares from resident to non-residents.

Transfer of shares & Convertible debentures:

1.       A person resident outside India (other than NRI or OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRI).

2.       NRI may transfer by way of sale or gift, the shares or convertible debentures to another NRI.

In both cases, if the transferee has existing tie-up/venture in India as on 12.01.2005in the same field in which the Indian company whose shares are being transferred, is engaged prior permission of SIA/FIPB has to be obtained for acquiring the shares.

3.       A person resident outside India can transfer any security to a person resident in India by way of gift.

4.       Non-residents can sell the shares/convertible debentures of a listed company through stock broker or a Merchant banker registered with SEBI.

5.       A resident of India can sell the shares/debentures of Indian company to non-residents & viceversa under private arrangement subject the guidelines specified in Annex – 3 of the master circular. However this general permission is not available if the entity is in financial service sector such as Banks, NBFC, ARC etc.

Reporting of transfer of shares/debentures from residents to non-residents & viceversa is to be made in FC-TRS within 60 days of receipt of consideration through AD category I bank.

Prior permission of the RBI for certain transfers:

1.       Transfer of shares/debenture of company engaged in financial service sector

2.       Transactions attract SAST Regulations

3.       Activity of the Indian company falls outside automatic route and requires FIPB approval for transfer.

4.       Transfer taken at a price, which falls outside the guidelines of RBI

5.       Deferement of payment of consideration by the non-resident acquirer.

Transfer of security by way of gift by rent to non-resident requires prior approval of RBI. Application for this purpose has to be made along with documents mentioned in Annex 4 to the master circular. RBI will consider following factors while processing the applications:

a.       Proposed transferee is eligible to hold securities.

b.      Gift doesnot exceed 5% of paid up capital of the company

c.       Within Sectoral limit

d.      Transferor & proposed transferee are close relatives as per sec.6 of the Companies Act

e.      Value of securities already transferred along with proposed transfer doesnot exceed USD 25,000/- in a calendar year.

f.        Other conditions as may be stipulated from time to time.

Conversion of ECB/Lumpsum Fee/Royalty/ Import of capital goods by SEZ to equity:

         i.            General permission has been granted to India companies to convert ECB to shares/preference shares subject to following terms & conditions:

a)      The activity covered under Automatice route for FDI or Government approval has been obtained.

b)      Foreign equity after conversion is within the sectoral cap.

c)       Pricing is as per SEBI guidelines/DCF method for Listed/Unlisted companies.

d)      Compliance with other Laws

       ii.            General permission also available for issue of shares/preference shares against Lumpsum technical knowhow Fee / Royalty under Automatic route/Govt.approval subject to pricing guidelines (SEBI/DCF).

      iii.            SEZ units permitted to issue equity shares to non-residents against import of capital goods subject to the valuation done by a committee consisting of Development Commisioner or appropriate customs officer.

     iv.            Reporting

a.       In case of full conversion of ECB to shares, details should be reported in  FC-GPR to Regional office of RBI and Form ECB – 2 to the Dept. of statistics & information Management of RBI within 7 working days from the date of close of the month to which it relates. The words “ECB wholly converted to Equity” should be clearly indicated on the top of the ECB – 2.

b.      In case of partial conversion of ECB to shares, details should be reported in  FC-GPR and Form ECB – 2 clearly distinguishing the converted portion from non-converted portion. The words “ECB partially converted to Equity” should be clearly indicated on the top of the ECB – 2.

c.       SEZ units issuing equity should report in FC-GPR.

Remittance of sale proceeds:

AD category I banks can allow the remittance of sales proceeds (net of tax) to the seller of share resident outside India, provided security has been held on repatriation basis, provided sales is in accordance with guidelines and NOC/tax clearance certificate has been obtained.

Remittance on Winding up/ Liquidation of Company:

AD category I bank is allowed to remit the proceeds subject to payment of taxes and order to Courts / Official liquidator (in case of voluntary winding up) provided applicant submits:

a.       NOC / tax clearance certificate from IT dept.

b.      Auditors certificate confirming that all liabilities in India have been fully paid or adequately provided for.

c.       Auditors certificate to the effect that winding up is in accordance with the provisions of the Companies Act, 1956.

d.      In case of winding up other than by court, an auditors certificate to the effect that there is no legal proceedings pending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance.

Investment in Partnership Firm / Proprietary Concern

1.       Investment by NRO / PIO

NRI or Person of Indian Origin (PIO) resident outside India can invest by way of contribution to the capital of Firm /proprietorship concern in India on non-repatriation basis provided:

a.       Amount invested by way of inward remittance or by NRE/FCNR(B)/NRO Account maintained with AD/Authorized Banks.

b.      Firm/Concern is not engaged in Agricultural, Plantation, real estate or Print media.

c.       Amount invested shall not be eligible for repatriation outside India.

NRI/PIO may seek prior permission of the RBI for investment in Firm/Concern on repatriation basis. The application will be decided in consultation with the Govt. of India.  Application should be addressed to Chief GM-in charge, RBI, Foreign Exchange Dept., Foreign Investment Division, Central Office, Mumbai.

2.       Investment by Non-residents:

Non-resident may make application & seek prior approval of the RBI for making investment in Firm/Concern or any association of persons in India. The application will be decided in consultation with the Govt. of India. Application should be addressed to Chief GM-in charge, RBI, Foreign Exchange Dept., Foreign Investment Division, Central Office, Mumbai.