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Fema Update

Mayur Nayak, Natwar Thakrar, Pankaj Bhuta
Chartered Accountants

Borrowing & Lending in Rupees

  1. Introduction

The knowledge of FEMA provisions are of utmost importance for dealing with non-residents. FEMA provisions are not only applicable when one is dealing with non-residents in foreign exchange but also when one is dealing with non-residents in Indian rupees.

According to section 6(3)(e) of FEMA 1999, the RBI may, by regulation, prohibit, restrict or regulate any borrowing or lending in rupees in whatever name called between a person resident in India and a person resident outside India. Consequently, RBI has issued Notification No: FEMA 4/2000-RB dated 3rd May, 2000 "Foreign Exchange Management (Borrowing and lending in Rupees) Regulation, 2000.

This article covers provisions relating to:

  1. Borrowing in Rupees from non-residents.
     

  2. Lending in Rupees to non–residents.

This article however does not cover the provisions relating to fixed deposits accepted by the company from non-residents as the same are covered under Notification No: FEMA 5/2000-RB dated 3rd May, 2000 Foreign Exchange Management (Deposit) Regulation, 2000.

Prohibition on borrowing and lending in Rupees

Regulation 3 provides that "No person resident in India shall borrow in rupees from or lend to, a person resident outside India otherwise than what is permitted under the Act, Rules or Regulations made there under".

It has been clarified by the RBI that use of credit card in India by a person resident outside India is permitted. It shall not be considered as borrowing in rupees by a person resident in India, even if it has been used for and on behalf of a person resident in India.

  1. Borrowing in rupees from non-residents

Under FEMA provisions, Indian corporate as well as non corporate entities are permitted to borrow from non-resident Indians (NRIs)/ Persons of Indian Origin (PIOs). However, after derecognition of Overseas Corporate Bodies as an eligible class of investor no person resident in India is allowed to borrow from or lend to an OCB in foreign currency or in rupees1.

2.1 Borrowing in rupees from non-residents by Non corporate entities and individuals:

Regulation 4 provides that non-corporate entities are permitted to borrow in rupees on non-repatriation basis from NRIs/ PIOs subject to following conditions:

Conditions to be fulfilled for borrowing:

  1. The amount of loan shall be received by way of inward remittance from outside India or out of Non-resident External (NRE)/Non-resident Ordinary (NRO)/Foreign Currency Non-resident (FCNR) account of the lender maintained with an authorised dealer or an authorised bank in India;
     

  2. The period of loan shall not exceed three years;
     

  3. The rate of interest on the loan shall not exceed two percentage points over the Bank rate prevailing on the date of availment of loan;
     

  4. The payment of interest and repayment of loan shall be made by credit to the lender’s Non resident ordinary (NRO) account as desired by the lender; and
     

  5. The amount borrowed shall not be allowed to be repatriated outside India. However interest thereon being a current account transaction can be repatriated subject to payment of Indian Income Tax.
     

  6. Reporting Requirements to RBI.

There is no reporting requirement for non-corporate entities as they are allowed to borrow only on non-repatriation basis.

However it maybe noted that the Non-resident Indians (NRIs)/ Persons of Indian Origin (PIOs)/ Foreign Nationals (including retired employees or non-resident widows of Indian citizens) can remit up to US$ one million per financial year out of balance held in NRO account/ sale proceeds of assets2. Thus practically the loan becomes repatriable up to US$ one million per financial year.

2.2 Borrowing in Rupees from Non-residents by Indian corporates

Regulation 5 provides that Corporates entities may borrow in rupees on repatriation as well as non repatriation basis, from Non-resident Indians (NRIs)/ Persons of Indian Origin (PIOs) through the issue of Non Convertible Debentures (NCDs).

  1. The issue of Non-convertible Debentures (NCDs) is made by public offer. Hence private placement is not permitted. Partly Convertible Debentures (PCDs) and Preference Shares are also not permitted as FDI regulations will be applicable to such securities.
     

  2. The rate of interest on such Non-convertible Debentures (NCDs) should not exceed the prime lending rate of the State Bank of India as on the date on which the resolution approving the issue is passed in the borrowing company’s General Body Meeting, plus 300 basis points; i.e., 3% per cent.
     

  3. The period for redemption of such Non-convertible Debentures (NCDs) should not be less than three years
     

  4. The borrowing company does not and shall not carry on agricultural/plantation/real estate business/Trading in Transferable Development Rights (TDRs) or does not and shall not act as Nidhi or Chit Fund company.
     

  5. Additional conditions for issue of NCDs on non-repatriation basis:
     

    6.

  1. the amount of investment is received either by remittance from outside India through normal banking channels or by transfer of funds held in the investor’s Non-resident External (NRE)/Non-resident Ordinary (NRO)/Foreign Currency Non-resident (FCNR) account maintained with an authorised dealer or an authorised bank in India.
     

  2. where the investment is made out of funds held in Non-resident Special Rupee (NRSR) account existing at that time (which is no more in existence now), the interest on such Non-convertible Debentures (NCDs) shall also not be repatriable outside India; and the maturity proceeds and interest on such debentures are credited only to the Non-resident Ordinary (NRO) account of the investor. (This condition stands diluted in view of the permissible remittance up to US$ one million out of NRO account per financial year)
     

  1. Additional conditions for issue of NCDs on repatriation basis:
     

    2.

    1. the percentage of Non-convertible Debentures (NCDs) issued to Non-resident Indians (NRIs) to the total paid-up value of each series of Non-convertible Debentures (NCDs) issued shall not exceed the ceiling prescribed for issue of equity shares/ convertible debentures for foreign direct investment in India as specified by the Reserve Bank from time to time, under the relevant regulations. Sectoral cap will have to be adhered to, and

    2. the amount of investment is received by remittance from outside India through normal banking channels or by transfer of funds held in the investor’s Non-resident External (NRE)/Foreign Currency Non-resident (FCNR) account maintained with an authorised dealer or an authorised bank in India;
       

  2. Reporting Requirements to RBI:

    3.

      The borrowing company has to file with the nearest office of the Reserve Bank (no specific form has been prescribed), not later than 30 days from the date:

    1.  of the receipt of remittance for investment in Non-convertible Debentures NCDs) , full details of the remittances received namely:

      1.  a list containing names and addresses of Non-resident Indians (NRIs) who have remitted funds for investment in Non-convertible Debentures (NCDs) on repatriation and/or non-repatriation basis,
         

      2. amount and date of receipt of remittance and its rupee equivalent, and
         

      3.  names and addresses of authorised dealers through whom the remittance has been received.
         

    2.  of issue of Non-convertible Debentures (NCDs), full details of the investment, namely:
       

      1. a list containing names and addresses of Non-resident Indians (NRIs) and number of Non-convertible Debentures (NCDs) issued to each of them on repatriation and/or non-repatriation basis and
         

      2.  a certificate from the Company Secretary of the borrowing company that all provisions of the Act, rules and regulations in regard to issue of Non-convertible Debentures (NCDs) have been duly complied with.

        3. No prior permission of Reserve Bank is required by Indian companies for repatriation of redemption proceeds of the NCDs /PCDs issued under erstwhile FERA, provided, they have complied with all other conditions stipulated in the relevant approved letter in term of regulation 5 of Notification No. FEMA 4/2000-RB dated 3rd May, 2000.

  1. Restriction on use of borrowed funds

Regulation 6 provides that "the person resident in India who borrows in rupees from a Non-resident has to use funds for his personal and/or business purpose only".

The business shall not be of :

– chit fund, or

– as Nidhi company, or

– agricultural or plantation activities, or

– real estate business; or construction of farm houses, or

– trading in Transferable Development Rights (TDRs).

However Real estate business for above purpose would not include development of townships, construction of residential/ commercial premises, roads or bridges. Hence, fund can be used for the development of townships, construction of residential/ commercial premises, roads or bridges.

Here, less number of activities are permitted as compared to activities permitted under FDI regulations.

It is further provided that the person resident in India shall not invest the borrowed funds for any investment, whether by way of capital or otherwise, in any company or partnership firm or proprietorship concern or any entity, whether incorporated or not.

However, practically monitoring of end use appears to be very difficult in absence of any apparent instructions to authorised dealers for its monitoring and no requirement on the part of the borrower to report to RBI. However, as provided in any statute the obligation or the onus is on the borrower to comply with provisions therefore it would be advisable for borrower to follow these guidelines in letter and spirit.

Borrowed funds are not allowed to be utilised for the purpose of re-lending as well.

  1. Loans in rupees to non - residents

Regulation 7 provides that "authorised dealers in India (Housing Finance Institution are not eligible) are allowed to grant loan in rupees to Non-resident Indians (NRIs) against the existing security of:

  1. Shares or other securities held by them or
     

  2. Immovable property (other than agricultural or plantation property or farm house), held by him in accordance with the Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulation, 2000."

Hence, commercial property appears to be offered as a security.

Conditions prescribed by RBI in this regard are as follows:

  1. The loan shall be utilised for meeting the borrower’s personal requirements or for his own business purposes and
     

  2. The loan shall not be utilised, either singly or in association with other person, for any of the activities in which investment by persons resident outside India is prohibited, namely;
     

    1. The business of chit fund, or
       

    2. Nidhi Company, or
       

    3. Agricultural or plantation activities or in real estate business, or construction of farm houses; or
       

    4. Trading in Transferable Development Rights (TDRs).

      5. However real estate business for above purpose shall not include development of townships, construction of residential /commercial premises, roads or bridges. Hence, fund can be used for the development of townships, construction of residential/commercial premises, roads or bridges.

  1. The Reserve Bank’s directives on advances against shares/securities/immovable property shall be duly complied with;
     

  2. The loan amount shall not be credited to Non-resident External (NRE)/Foreign Currency Non-resident (FCNR) account of the borrower;
     

  3. The loan amount shall not be remitted outside India:
     

  4. The repayment of loan shall be made from out of remittances from outside India through normal banking channels or by debit to the Non-resident Ordinary (NRO)/Non-resident External (NRE)/Foreign Currency Non-resident (FCNR) account of the borrower or out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

  1. for any other purpose as per the loan policy laid down by the Board of Directors of the Authorised Dealer.

The quantum of loan, rate of interest, margins etc. on such loans may be decided by the Authorised Dealers based on relevant directives issued by the Department of Banking Operations and Development in this regard.

  1. Housing Loan in rupees to a Non-resident

Regulation 8 provides that "an authorised dealer or a housing finance institution in India approved by the National Housing Bank can provide housing loan to a non-resident Indian (NRIs) or a person of Indian origin resident outside India (PIOs), for acquisition of a residential accommodation in India".

It was clarified by the RBI that authorised dealer/ a housing finance institution may grant loan to NRIs and PIOs for the purpose of repairs/renovation/improvement of residential accommodation owned by them in India5.

Conditions to be fulfilled for providing Housing Loan:

  1. The quantum of loans, margin money and the period of repayment shall be at par with those applicable to housing finance provided to a person resident in India;
     

  2. The loan amount shall not be credited to Non-resident External (NRE) / Foreign Currency Non-resident (FCNR) account of the borrower;
     

  3. The loan shall be fully secured by equitable mortgage of the property proposed to be acquired, and if necessary, also by lien on the borrower’s other assets in India;
     

  4. The instalment of loan, interest and other charges, if any, shall be paid by the borrower by remittances from outside India through normal banking channels or out of funds in his Non-resident External (NRE)/Foreign Currency Non-resident (FCNR)/ Non-resident Ordinary (NRO) account in India, or out of rental income derived from renting out the property acquired by utilisation of the loan6 or by any relative of the borrower in India by crediting the borrower’s loan account through the bank account of such relative;

    Relative’ for above purpose means ‘relative’ as defined in section 6 of the Companies Act, 1956.

    The notification is silent about payment of any interest from NRIs/PIOs to a resident relative, on such amount credited by a resident relative.
     

  5. The rate of interest on the loan shall conform to the directives issued by the Reserve Bank or, as the case may be, by the National Housing Bank.

The authorized dealers can allow repatriation of sales proceeds of residential accommodation purchased by NRIs/PIOs out of funds raised by them by way of loan
from authorized dealers/ housing finance institutions to the extent such loan is repaid by them out of foreign inward remittance received through normal banking channel or by debit to their NRE/FCNR Accounts

  1. Rupee Loans to NRI/PIO employees of Indian body Corporate

Regulation 8A8 provides that "a body corporate registered or incorporated in India may grant rupee loan to its employees who is a non-resident Indian or a Person of Indian Origin, subject to the following conditions, namely.

  1. The loan shall be granted only for personal purposes including purchase of housing property in India.
     

  2. The loan shall be granted in accordance with the lender’s Staff Welfare Scheme /Staff Housing Loan Scheme and other terms and conditions applicable to its staff resident in India;
     

  3. The lender shall ensure that the loan amount is not used for the prohibited purpose mentioned in Regulation 6.
     

  4. The lender shall credit the loan amount to the borrower’s NRO Account in India or shall ensure credit to such Account by specific indications on the payment instrument;
     

  5. It shall be a term of the loan agreement that the repayment of loan shall be made by way of remittance from outside India or from NRE/NRO/FCNR Account of the borrower; and the lender shall not accept repayment made from any other source.

Hence, repayment of such loan may not be permitted to be adjustable directly from salary.

  1. Continuance of Rupee loan/Overdraft to resident who becomes a person resident outside India

Regulation 9 provides that "an authorised dealer or, as the case may be, an authorised bank, may allow continuance of loan/overdraft granted to a person resident in India who subsequently becomes a person resident outside India, subject to following terms and conditions":

  1. the authorised dealer or the authorised bank is satisfied, according to his/its commercial judgment, about the reasons to continue the loan or overdraft;
     

  2. the period of loan or overdraft shall not exceed the period originally fixed at the time of granting the loan or overdraft;
     

  3. so long as the borrower continues to remain a person resident outside India, the repayment shall be made either by inward remittance from outside India through normal banking channels or from the funds held in Non-resident External (NRE)/Foreign Currency Non-resident(FCNR)/Non-resident Ordinary (NRO) account of the borrower.

  1. Loan given to Students Studying Abroad

RBI has clarified that such students can continue educational and other loans availed by them as resident of India9.

This circular seems to travel beyond strict interpretation of definition of a person resident in India.

As non-residents, they will be eligible for receiving remittances from India as follows:

  1. up to US $ 1,00,000 from close relatives from India on self declaration towards maintenance, which could include remittances
    towards their studies.
     

    2.

  2. Up to US $ 1 million out of sale proceeds/balances in their account maintained with an AD in India.
     

  3. all other facilities available to NRIs under FEMA.

  1. Continuance of Rupee loan in the event of change in residential status of the lender

Regulation 10 provides that "in case a rupee loan was granted by a person resident in India to another person resident in India and the lender subsequently becomes a non-resident, the repayment of the loan by the resident borrower should be made by credit to the Non-resident Ordinary (NRO) account of the lender maintained with a bank in India, at the option of the lender".

  1. Overdraft in rupee account maintained with authorised dealer in India by bank outside India

Regulation 11 provides that "an authorised dealer may permit a temporary overdraft, for value not exceeding Rs five hundred lakhs, in rupee accounts maintained with him by his overseas branch or correspondent or Head Office outside India, subject to such terms and conditions as the Reserve Bank may direct from time to time".

Conclusion

No prior permission for Borrowing and Lending with Non Resident Indians/Person of Indian origin is required if all conditions as mentioned as above are complied with. However, RBI permission is required if any of the conditions mentioned above is not satisfied. There is a huge increase in borrowing or lending in recent years with rapid globalisation and world economy integrating like never before. Due to stringent regulations on External Commercial Borrwings (ECBs) by Indian residents there is a move to borrow from NRIs as there are less end use restrictions compared to that in case of ECBs.

Flash News

  1. Remittances to non-residents – Deduction of tax at sources
    On the basis of the communication received from CBDT, Department of Revenue, Ministry of Finance, Government of India, it is clarified that under section 195 of the Income-tax Act read with Rule 29B of the IT Rules, any person responsible for making payment to a non-resident or to a foreign company, any interest or any other sum chargeable under the IT Act, shall at the time of payment or credit of the amount deduct Income Tax thereon at the rate in force. Section 195 of the IT Act is not limited to interest income and it takes into account business income also. Further, points 7 and 8 of the Chartered Accountant’s certificate deals with remittances for supply of articles or things (plant, machinery, equipment, etc.) or computer software and business income, respectively.

    Accordingly, a remitter of foreign exchange is required to submit to the authorised dealer, an undertaking and Chartered Accountant’s certificate in the format prescribed by CBDT vide circular No. 10/2002 dated October 9, 2002 at the time of making the remittance in foreign exchange to non-residents including remittances which are in the nature of trade transactions such as import payments.

    In view of this circular, all import transactions would require an undertaking and Chartered Accountant’s certificate. It is to be noted that, this will be required only when income is chargeable under the IT Act.

    (A.P. (DIR Series) Circular No. 03/2007-08 -RB, dtd.19-7-2007)
     

  2. Further restrictions on ECB

    RBI vide its Circular No. 04 dated August 7, 2007 imposed following further restrictions on External Commercial Borrowings:
     

    1. ECB more than US $ 20 million per borrower company per financial year would now be permitted only for expenditure in foreign currency that too only for permissible end-uses of ECB. Accordingly, borrowers raising ECB more than US $ 20 million will have to park the ECB proceeds  overseas for use as foreign currency expenditure for permissible end– uses and shall not remit the funds to India.
       

    2. As hitherto, ECB raised up to US $ 20 million under the automatic route for permissible end-uses have to be parked outside India until actual requirement in India.
       

    3. Borrowers proposing to avail ECB up to US $ 20 million for expenditure in Indian rupees for permissible end-uses will have to obtain prior approval from RBI under the approval route.

      4. The above changes will have far reaching impact on even small borrowers. Practically the automatic route has been suspended for every small borrower who needs to spend in Indian rupees. These borrowers will have to depend upon Indian lenders for raising loans.

Borrowers already in the process of raising ECB, who have entered into loan agreement and/or obtained loan registration number are kept out of the purview of above changes.
 

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