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In this article, we have discussed recent important amendments to FEMA.

Hitherto Authorised Dealers and their exchange bureaux were required to issue Encashment Certificates (EC) in Form ECF in all cases of purchase of foreign exchange from the public, irrespective of whether the Currency Declaration Form (CDF) has been submitted or not by the tenderer of foreign exchange and whether the tenderer requests for the certificate or not. The certificate was required to be issued on security paper, if the amount of foreign currency encashed exceeds Rs. 15,000/- in value and in other cases, on the letterhead of the authorised dealer/exchange bureaux (with their logo printed on it).

The compulsory requirement of issuance of Encashment Certificate on security paper is now dispensed with.

Encashment Certificate in Form ECF, duly signed by authorised officials may be issued by Category I ADs when requested by the customer on their letterhead (with their logo printed on it), irrespective of the amount and a proper record of all Encashment Certificates issued should be maintained.

In cases where the Encashment Certificate is not issued, attention of the customer should be drawn to the fact that in the absence of encashment certificate, unspent local currency held by non-resident visitors will not be allowed to be converted into foreign currency.

[Source: A.P. (DIR Series) Circular No. 2 dated July 17, 2006]

Presently under Regulation 6B and under Regulation 26 of Notification No. FEMA 120 titled ‘Transfer or Issue of any Foreign Security (Amendment Regulation 2004)’, Mutual Funds registered with SEBI are permitted to invest in ADRs/GDRs of Indian companies, rated debt instruments and also in the equity of overseas companies listed on a recognised stock exchange overseas and having a shareholding of at least 10 per cent in a listed Indian company.

To enable the Mutual Funds to tap a larger investible stock overseas, the requirement of 10 per cent reciprocal shareholding in the listed Indian companies by such overseas companies is now dispensed with.

The aggregate ceiling for overseas investment by Mutual Funds, registered with SEBI, is increased from US$ 1 billion to US$ 2 billion with immediate effect. It has also been decided to allow a limited number of qualified Indian Mutual Funds to invest cumulatively up to US$ 1 billion in overseas Exchange Traded Funds if so permitted by the SEBI.

[Source: A.P. (DIR Series) Circular No. 3 dated July 26, 2006]

FIIs were hitherto required to provide cash margins to the recognized Stock Exchanges for dealings in derivatives segment. In a measure of liberalization, FIIs are now allowed to offer foreign sovereign securities with AAA rating as collateral to the recognised Stock Exchanges in India for their transactions in derivatives segment.

The operational guidelines in this regard shall be issued separately by SEBI. Thereafter, recognised Stock Exchanges in India may approach the Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai – 400 001 for specific approvals as may be necessary under the Foreign Exchange Management Act, 1999.

[Source: A.P. (DIR Series) Circular No. 4 dated July 28, 2006]

In terms of Regulations 3 and 4 of the Notification No. 21, Indian citizen resident outside India and Person of Indian origin can acquire immovable property in India other than agricultural property, plantation or a farm house.

It is now clarified that the payment for such acquisition shall be made out of

1. funds received in India through normal banking channels by way of inward remittance from any place outside India or
    

2. funds held in any non-resident account maintained in accordance with the provisions of the Foreign Exchange Management Act, 1999 and the regulations made by Reserve Bank of India from time to time.

Accordingly, such payment now cannot be made either by traveller’s cheque or by foreign currency notes or by other mode other than those specifically mentioned above.

[Source: A.P. (DIR Series) Circular No. 5 dated August 16, 2006 & Notification No. 146 dated February 10, 2006]

Hitherto, entities engaged in financial services activities in India making investment in non-financial services activities overseas were not required to comply with the following additional conditions mentioned in Regulation 7 of the Notification 120 titled ‘Transfer or issue of any Foreign Security (Amendment Regulation 2004)’ namely:–

1. Earning of net profit during the preceding three financial years from the financial services activities;
    

2. Registration with the regulatory authority in India for conducting the financial services activities;
    

3. Approval from the concerned regulatory authorities both in India and abroad, for venturing into such financial sector activity;
    

4. Fulfilment of the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

With a view to assess the impact of the overseas operations of such financial services entities on a consolidated basis, it is now decided that regulated entities in financial sector in India investing overseas in any activities will also have to comply with the conditions stipulated in Regulation 7 of the Notification.

RBI has also clarified that trading in Commodities Exchanges overseas and setting up JV/WOS for trading in Overseas Commodities Exchanges will be reckoned as financial services activity and will require clearance from the Forward Markets Commission (FMC). The FMC has recently put in place guidelines for allowing FMC registered members of Commodity Exchanges to undertake commodity related activities abroad. Indian entities desirous of setting up of JV/WOS overseas for trading in overseas commodities exchanges may, therefore, approach the FMC for regulatory clearance.

Unregulated Indian entities engaged in the financial services activities in India need not comply with the additional conditions mentioned in Regulation 7 and may continue to invest in non-financial sector activities overseas subject only to Regulation 6 of the Notification.

[Source: A.P. (DIR Series) Circular No. 6 dated September 6, 2006]

The ceiling for overseas investment by Mutual Funds, registered with SEBI, which was increased from US $ 1 billion to US $ 2 billion vide Circular No. 3 dated 26th July, 2006 , is further increased to US $ 3 billion with effect from 16th November 2006.

[Source: A.P. (DIR Series) Circular No. 11 dated November 16, 2006]

The existing Regulation 4 of the Notification No. 13 titled ‘Remittance of Assets’ permit Non-Resident Indians (NRIs) and Persons of Indian Origin (PIO) to remit up to US $ one million per calendar year for any bonafide purpose out of the balances in their Non-Resident Ordinary (NRO) accounts. The balance in the NRO accounts may also include the sale proceeds of immovable property acquired by the non-resident out of her/his resources in India, or sale proceeds of property received by way of inheritance or gift.

The remittance of sale proceeds of the immovable property was however subject to a lock-in period of 10 years.
The lock-in period of 10 years for remittance of sale proceeds of immovable property has been dispensed with. The period is also changed from calendar year to financial year. Accordingly, the AD Category–I banks can now allow remittances out of balances in NRO accounts including sale proceeds of immovable property provided the amount does not exceed US $ one million per financial year (April-March). Other terms and conditions remain unchanged.

[Source: A.P. (DIR Series) Circular No. 12 dated November 16, 2006]

Presently, under Regulation 4 the Notification No. 8 ‘Guarantees’, AD Category-I banks are allowed to give guarantees only for specified purposes as stated therein.

With a view to further liberalise the procedure for import of services, AD Category-I banks are now permitted to issue guarantee on behalf of their customers importing services, provided:

1. the guarantee amount does not exceed US $ 100,000,
    

2. the AD Category-I bank is satisfied about the bonafides of the transaction.
    

3. the AD Category-I bank ensures submission of documentary evidence for import of services in the normal course, and
    

4. the guarantee is to secure a direct contractual liability arising out of a contract between a resident and a non-resident.

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, Foreign Investments Division (EPD), Reserve Bank of India, Central Office, Mumbai – 400 001 a report on the circumstances leading to the invocation of the guarantee.

[Source: A.P. (DIR Series) Circular No. 13 dated November 17, 2006]

In terms of Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, prior approval of the Reserve Bank was required for drawing foreign exchange ‘for remittance for purchase of trademark or franchise in India’ [item 16 of Schedule III to the Foreign Exchange Management (Current Account Transactions) Rules, 2000].

With a view to liberalising the procedure further and providing greater flexibility, in Schedule III, item number 16 and the entry relating thereto namely ‘remittance for purchase of trademark or franchise in India’ has been omitted. Therefore , now AD Category-I banks can permit drawal of foreign exchange by person for purchase of trademark or franchise in India without prior approval of the Reserve Bank.

[Source: A.P. (DIR Series) Circular No. 14 dated November 28, 2006 and Notification G.S.R. 412[E] dated July 10, 2006]

Regulation 4 of Notification No. FEMA 10 – ‘Foreign Currency Accounts by a person resident in India’ permits a person resident in India to open and maintain with an authorized dealer in India a Foreign Currency Account known as Exchange Earner’s Foreign Currency (EEFC) Account subject to the limits and certain terms and conditions specified in the Schedule to the Notification.

With a view to liberalising the procedure further and provide greater flexibility, RBI has increased the limits for retaining foreign exchange in EEFC accounts as follows:–

Entity/Person	Existing limit (per cent)	New limit (per cent)
A Status Holder Exporter (as defined in EXIM Policy in force)	100	100
A resident in India for professional Services rendered in his individual capacity	100	100
100 per cent Export Oriented Unit/s. Unit/s in  EPZs/STPs/EHTPs	70	100
Any other person resident in India	50	50

RBI has also allowed all categories of foreign exchange earners to credit up to 100 per cent of their foreign exchange earnings, as specified in the paragraph 1 (A) of the Schedule, to their EEFC Account with immediate effect.

[Source: A.P. (DIR Series) Circular No. 15 dated November 30, 2006]

Presently, under Regulation 6 of the Notification No. 3 – ‘Borrowing or Lending in Foreign Exchange’ corporates can avail ECB up to US $ 500 million during a financial year under Automatic Route with minimum average maturity period of 5 years.

With a view to liberalizing the ECB guidelines, RBI has allowed corporate borrowers to avail ECB of an additional amount of US $ 250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of US $ 500 million under the automatic route, during a financial year. Other ECB criteria such as end-use, all-in-cost ceiling, recognised lender, etc. need to be complied with. Prepayment and call/put options however would not be permissible for such ECB up to a period of 10 years.

Further, prepayment of ECB up to US $ 300 million, as against the existing limit of US $ 200 million, will be allowed by AD Category - I banks without prior approval of the Reserve Bank subject to compliance with the minimum average maturity period as applicable to the loan.

[Source: A.P. (DIR Series) Circular No. 17 dated December 4, 2006]

Presently, under sub-regulation 4A of Regulation 7 of Notification No. 10 – ‘Foreign Currency Accounts by a Person Resident in India’, AD Category–I banks are permitted to allow remittance up to 10 per cent and 5 per cent of the average annual sales/income or turnover during last two accounting years of the Indian entity for initial and recurring expenses respectively, for the purpose of normal business operations of the branch or office or representative abroad.

This limit is further increased subject to existing terms and conditions as under:

1. Initial expenses
   
   up to 15 per cent of the average annual sales/income or turnover during the last two financial years or up to 25 per cent of the net worth, whichever is higher.
    

2. Recurring expenses
   
   up to 10 per cent of the average annual sales/income or turnover during the last two financial years.

Acquisition of immovable property

RBI has also dispensed with the requirement of obtaining prior permission for acquisition of Immovable Property Outside India for a company incorporated in India and having overseas offices. Accordingly, AD Category–I banks are allowed to make remittances for a company incorporated in India having overseas offices, within the above limits for initial and recurring expenses, to acquire immovable property outside India for its business and for residential purpose of its staff.

[Source: A.P. (DIR Series) Circular No. 18 dated December 4, 2006]

N.B. RBI during the fiscal policy made announcement to increase the limits for resident individuals for drawal of foreign exchange from the current US $ 25,000 (which is currently available per calendar year) to US $ 50,000 for specified capital account transactions. However, a formal announcement in the form of Notification/Circular is still awaited.

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