RBI had vide its circular A.P. (DIR Series) Circular No. 15 dated October 1, 2004, informed that an Indian company can issue equity shares against External Commercial Borrowings (ECB) subject to conditions mentioned therein and pricing guidelines as prescribed by the Reserve Bank from time to time regarding value of equity shares to be issued. Reserve Bank had received some references regarding how the rupee amount against which equity shares are to be issued shall be arrived at; in other words, what rate of exchange shall be applied to the amount in foreign currency borrowed or owed by the resident entity from/to the non-resident entity.
RBI has now vide its circular RBI/2013-2014/449 A.P. (DIR Series) Circular No. 94 dated 16th January, 2014 clarified that where the liability sought to be converted by the company is denominated in foreign currency as in case of ECB, import of capital goods, etc. it will be in order to apply the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion. Reserve Bank will have no objection if the borrower company wishes to issue equity shares for a rupee amount less than that arrived at as mentioned above by a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.
It is further clarified that the principle of calculation of INR equivalent for a liability denominated in foreign currency as mentioned at paragraph 3 above shall apply, mutatis mutandis, to all cases where any payables/liability by an Indian company such as, lump sum fees/royalties, etc. are permitted to be converted to equity shares or other securities to be issued to a non-resident subject to the conditions stipulated under the respective Regulations.
RBI had informed vide Regulation 4 of Notification No.FEMA.22/2000-RB dated May 3, 2000, viz., Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000, as amended from time to time, in terms of which, no entity or person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China shall establish in India, a branch office or a liaison office or a project office or any other place of business by whatever name called, without the prior permission of the Reserve Bank.
RBI has now clarified vide its circular RBI/2013-14/447 A.P. (DIR Series) Circular No.93 dated January 15, 2014 that the provisions of Regulation 4 of Notification No. FEMA 22/2000-RB dated 3rd May 2000, ibid, along with their specified conditions apply for entities from Hong Kong and Macau also. Accordingly, applications from entities registered in / resident of Hong Kong and Macau, for establishment of Liaison/ Branch/ Project Offices or any other place of business by whatever name called shall require prior approval from Reserve Bank of India.
In terms of Section 6 (4) of FEMA, 1999, a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.
RBI has vide RBI/2013-14/440 A.P. (DIR Series) Circular No. 90 dated 9th January, 2014 informed that they have been receiving representations with regards to nature of transactions covered under Section 6(4) of FEMA, 1999. In this regard it is clarified that Section 6(4) of FEMA, 1999 covers the following transactions:
Foreign currency accounts opened and maintained by such a person when he was resident outside India;
Income earned through employment or business or vocation outside India taken up or commenced while such person was resident outside India, or from investments made while such person was resident outside India, or from gift or inheritance received while such a person was resident outside India;
Foreign exchange including any income arising there from, and conversion or replacement or accrual to the same, held outside India by a person resident in India acquired by way of inheritance from a person resident outside India.
A person resident in India may freely utilise all their eligible assets abroad as well as income on such assets or sale proceeds thereof received after their return to India for making any payments or to make any fresh investments abroad without approval of Reserve Bank, provided the cost of such investments and/ or any subsequent payments received therefor are met exclusively out of funds forming part of eligible assets held by them and the transaction is not in contravention to extant FEMA provisions.
In terms of Regulation 5 (1) of Foreign Exchange Management (Transfer and Issue of shares by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000 only equity shares or preference shares/debentures are eligible to be issued to persons resident outside India under the Foreign Direct Investment Scheme.
RBI has now vide its circular - RBI/2013-2014/436 A.P. (DIR Series) Circular No. 86 dated 9th January, 2014 decided that optionality clauses may henceforth be allowed in equity shares and compulsorily and mandatorily convertible preference shares/debentures to be issued to a person resident outside India under the Foreign Direct Investment (FDI) Scheme. The optionality clause will oblige the buy-back of securities from the investor at the price prevailing/value determined at the time of exercise of the optionality so as to enable the investor to exit without any assured return. The provision of optionality clause shall be subject to the following conditions:
There is a minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence and construction development sector where the lock-in period of three years has been prescribed). The lock-in period shall be effective from the date of allotment of such shares or convertible debentures or as prescribed for defence and construction development sectors, etc. in Annex B to Schedule 1 of Notification No. FEMA. 20 as amended from time to time;
After the lock-in period, as applicable above, the non-resident investor exercising option/right shall be eligible to exit without any assured return, as under:
In case of a listed company, the non-resident investor shall be eligible to exit at the market price prevailing at the recognised stock exchanges;
In case of unlisted company, the non-resident investor shall be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet. Any agreement permitting return linked to equity as above shall not be treated as violation of FDI policy/FEMA Regulations.Note: For the above purpose, RoE shall mean Profit After Tax / Net Worth; Net Worth would include all free reserves and paid up capital.
Investments in Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible Preference Shares (CCPS) of an investee company may be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. The guiding principle would be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at the price prevailing at the time of exit, subject to lock-in period requirement, as applicable.
In terms of to RBI circular A.P.(DIR Series) Circular No.12 dated September 15, 2011, individuals resident in India were permitted to include non-resident close relative(s) (relatives as defined in Section 6 of the Companies Act, 1956) as a joint holder(s) in their resident savings bank accounts on “former or survivor” basis. Such non-resident Indian close relatives are however not eligible to operate the account during the life time of the resident account holder in terms of said instructions.
RBI has vide its Circular RBI/2013-2014/437 A.P. (DIR Series) Circular No. 87 dated 9th January, 2014 informed that they have received representations that for operational convenience the Non-Resident Indians (NRIs), as defined in Regulation 2(vi) of FEMA Notification No.5 dated May 3, 2000, may be permitted to operate such accounts on “Either or Survivor” basis.
Accordingly, on a review, RBI has decided that AD banks may include an NRI close relative (relatives as defined in Section 6 of the Companies Act, 1956) in existing / new resident bank accounts as joint holder with the resident account holder on “Either or Survivor” basis subject to the following conditions:
Such account will be treated as resident bank account for all purposes and all regulations applicable to a resident bank account shall be applicable.
Cheques, instruments, remittances, cash, card or any other proceeds belonging to the NRI close relative shall not be eligible for credit to this account.
The NRI close relative shall operate such account only for and on behalf of the resident for domestic payment and not for creating any beneficial interest for himself.
Where the NRI close relative becomes a joint holder with more than one resident in such account, such NRI close relative should be the close relative of all the resident bank account holders.
Where due to any eventuality, the non-resident account holder becomes the survivor of such an account, it shall be categorized as Non-Resident Ordinary Rupee (NRO) account as per the extant regulations.
Onus will be on the non-resident account holder to keep AD bank informed to get the account categorized as NRO account and all such regulations as applicable to NRO account shall be applicable.
The above joint account holder facility may be extended to all types of resident accounts including savings bank account.
While extending this facility the AD bank should satisfy itself about the actual need for such a facility and also obtain the prescribed declaration duly signed by the non-resident account holder.
In terms of RBIs earlier notifications, the definition of infrastructure sector for the purpose of raising ECB was expanded 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.
2.RBI has on a review decided and confirmed vide its circular RBI/2013-2014/429 A.P. (DIR Series) Circular No. 85 dated January 6, 2014 that, for the purpose of ECB, ‘Maintenance, Repairs and Overhaul’ (MRO) will also be treated as a part of airport infrastructure.
Accordingly, MRO, as distinct from the related services which are other than infrastructure, will be considered as part of the sub-sector of Airport in the Transport Sector of Infrastructure.
In terms of FEMA Regulations, equity shares, compulsorily and mandatorily convertible preference shares and compulsorily and mandatorily convertible debentures are treated as a part of share capital for the purpose of Foreign Direct Investment.
RBI has vide its notification no. RBI/2013-2014/428 A.P. (DIR Series) Circular No.84 dated 6th January, 2014 informed that they have been receiving references from some Indian companies regarding issue of non-convertible/ redeemable bonus preference shares or debentures to non-resident shareholders from the general reserve under a Scheme of Arrangement by a Court, under the provisions of the Companies Act, as applicable. So far, Reserve Bank has been granting permission for such issuances on a case-to-case basis. RBI has on review and with a view to rationalize and simplify the procedures, decided that an Indian company may issue non-convertible/redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR/GDR holders, by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable, subject to no-objection from the Income Tax Authorities.
The above general permission to Indian companies is only for issue of non-convertible/ redeemable preference shares or debentures to non-resident shareholders by way of distribution as bonus from the general reserves. The issue of preference shares (excluding non-convertible/redeemable preference shares) and convertible debentures (excluding optionally convertible/partially convertible debentures) under the FDI scheme would continue.
RBI Vide its notification no. RBI/2013-14/427 A.P. (DIR Series) Circular No.83 dated 03rd January, 2014 informed that it has been decided not to treat / reckon the renewal / rollover of an existing / original guarantee, which is part of the total financial commitment of the Indian party in terms of Regulation 6 of FEMA Notification, as a fresh financial commitment, provided that :
the existing / original guarantee was issued in terms of the then extant / prevailing FEMA guidelines.
there is no change in the end use of the guarantee, i.e. the facilities availed by the JV / WOS / Step Down Subsidiary;
there is no change in any of the terms & conditions, including the amount of the guarantee except the validity period;
the reporting of the rolled over guarantee would be done as a fresh financial commitment in Part II of Form ODI, as hitherto; and
if the Indian party is under investigation by any investigation / enforcement agency or regulatory body, the concerned agency / body shall be kept informed about the same.
In case, however, the above conditions are not met, the Indian party shall obtain prior approval of the Reserve Bank for rollover / renewal of the existing guarantee through the designated AD bank.
February 5, 2014