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Fema Update

In this Update, we have discussed some of the recent amendments under FEMA:–

  1. Liberalisation of provisions related Refund of Export Proceeds

    Presently, refund of export proceeds was permitted by AD Category – I banks provided such goods are re-imported into India on account of poor quality etc. and evidence of re-import has been submitted.

    With a view to further liberalising the procedure, RBI has permitted AD Category – I banks, through whom the export proceeds were originally realised, may henceforth, consider requests for refund of export proceeds of goods exported from India and being re-imported into India on account of poor quality. While permitting such transactions, AD Category – I banks are required to :

  1. exercise due diligence regarding the track record of the exporter;

  2. verify the bonafides of the transactions;

  3. obtain from the exporter a certificate issued by DGFT/Custom authorities that no incentives have been availed by the exporter against the relevant export or the proportionate incentives availed, if any, for the relevant export have been surrendered;

  4. obtain an undertaking from the exporter that the goods will be re-imported within three months from the date of remittance; and

  5. ensure that all procedures as applicable to normal imports are adhered to.

(A.P. Dir. No. 37/2006-07-RB, DT. 5-4-2007)

  1. Liberalisation of Current Account Transaction

    In Foreign Exchange Management (Current Account Transaction) Rules, 2000, notified vide Notification No. G.S.R. 381(E) dated 3rd May, 2000, as amended from time to time (the Rules) the Central Government, hereby makes the following amendments w.e.f. 28-7-2005 namely :–

  1. in Schedule I, brackets, words and figures ‘(see Rule 3)’ the following words, brackets and figure shall be substituted, namely :— ‘Transactions which are Prohibited (see rule 3)’,

  2. in Schedule II, for the brackets, words and figure ‘(see Rule 4)’, the following words, brackets and figure shall be substituted, namely:— ‘Transactions which require prior approval of the Central Government (see Rule 4)’.

    (A.P. (DIR Series) Circular. No. 38/2006-07-RB, dated 5th April 2007)

  1. Reporting under FDI Scheme – Revised Form FC-GPR

    As per para 9(1) B of Schedule I to the Notification No. FEMA 20/2000-RB dated May 3,2000, as amended from time to time, Indian companies are required to report the details of Foreign Direct Investment (FDI) in Form FC-GPR to the Regional Office of RBI within whose jurisdiction the Registered Office of the Company operates, within 30 days of issue of shares.

    In order to capture the details of FDI in a comprehensive manner, Form FC-GPR has been revised in consultation with the Government of India.

    As per the revised format, details of FDI are required to be furnished in Part A and B. Part A has to be filed by the company, through AD Category – I bank, to the concerned Regional Office of RBI. Part B, which is an annual report of all investments made by the company during a financial year, is required to be submitted directly by the company to the Director, Balance of Payment Statistical Division, Department of Statistical Analysis & Computer Services, Reserve Bank of India, C-9, 8th Floor, Bandra-Kurla Complex, Bandra (E), Mumbai 400 051, by 30th June every year.

    The AD Category – I bank in India, receiving the remittance should obtain a KYC report in respect of the foreign investor from the overseas bank remitting the amount. If the AD Category – I bank receiving the remittance is different from the AD Category – I bank forwarding Form FC-GPR, the latter should file Form FC-GPR along with a certificate from the former of having received the inward remittance and the KYC report.

    (A.P. (DIR Series) Circular No. 40/2006-07-RB dated 20th April 2007)

  2. Rationalisation of Overseas Direct Investment from India

In order to rationalise the existing provisions of Notification No. FEMA 120/RB-2004 dated July 7, 2004 as amended from time to time, the following changes have been effected in the Regulations governing overseas investments.

4.1 Investment in a foreign security by swap or exchange of shares of an Indian company Presently in terms of Regulation 8 of the Notification ibid, an Indian party is permitted to acquire shares of a foreign company, engaged in a bonafide business activity, in exchange of ADRs/GDRs issued to the latter in accordance with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Central Government. This is further subject to certain conditions, valuation norms and reporting to the Reserve Bank. Such acquisitions shall, henceforth, be considered as an accepted mode of overseas direct investment and shall be subsumed under the limit specified in Regulation 6 of the Notification ibid.

(A.P. DIR Series Circular No. 41/2006-07-RB dated 20th April, 2007)

4.2 Pledge of shares of the overseas JV / WOS to an overseas lender

Presently in terms of Regulation 18 of the Notification ibid, an Indian party is permitted to transfer by way of pledge, shares held in a JV/WOS outside India, as a security for availing of fund based or non-fund based facilities for itself or for the JV/WOS, to an AD Category – I bank in India.

In order to provide operational flexibility to Indian parties for availing fund based and non-fund based facilities overseas, Indian parties are now permitted to transfer by way of pledge, the shares held in overseas JV / WOS, to an overseas lender, provided the lender is regulated and supervised as a bank and the total financial commitments of the Indian party remain within the limit stipulated by Reserve Bank for overseas investments.

(A.P. DIR Series Circular No. 41/2006-07-RB dated 20th April, 2007)

4.3 Overseas investment by Venture Capital Funds (VCFs)

Reserve Bank of India, in consultation with the Securities and Exchange Board of India (SEBI), has decided to permit Indian Venture Capital Funds (VCFs), registered with SEBI, to invest in equity and equity-linked instruments of off-shore venture capital undertakings, subject to an overall limit of US$ 500 million and SEBI regulations issued in this regard.SEBI have accordingly notified the enabling Venture Capital Funds (Amendment) Regulations 2006 on January 25, 2006.

Allocations of limits to individual VCFs will be made by SEBI, subject to such terms and conditions as SEBI may deem necessary.

Accordingly, Domestic Venture Capital Funds registered with SEBI, desirous of making investments in off-shore Venture Capital Funds may approach SEBI for prior approval in this regard. No separate permission from the Reserve Bank is necessary for such VCFs.

(A.P. (DIR Series) Circular No. 49/2006-07-RB dated 30-4-2007)

  1. Overseas Foreign Currency Borrowings by Authorised Dealer Banks

    Para 97 of Mid Term Review of the Annual Policy for the year 2006-07 regarding overseas foreign currency borrowings by Authorised Dealer Banks announced on October 31, 2006, seeks to provides flexibility to authorised dealer banks in seeking access to funds overseas from their overseas branches and correspondent banks (including borrowings for financing export credit, ECBs and overdrafts from their Head Office/Nostro account).
     
    In view of the prevailing market conditions and the likely impact on liquidity, it has been decided to keep the operationalisation of the policy announcement in abeyance.
     
    (A.P. (DIR Series) Circular No. 42/2006-07-RB dated 23-4-2007)

     

  2. Liberalisation of prepayment of External Commercial Borrowings (ECB)

    With a view to providing greater flexibility to the corporates in managing their liquidity and interest costs dynamically, the existing limit for prepayment of ECB has been enhanced from US$ 300 million to US$ 400 million. Accordingly, AD Category – I banks may allow prepayment of ECB up to US$ 400 million, without prior approval of the Reserve Bank subject to compliance with the minimum average maturity period as applicable to the loan.

    A.P. (DIR Series) Circular No. 44/2006-07-RB dated 30th April 2007
     

  3. Current Account Liberalisation

7.1 Remittance towards donation by Corporates – Liberalisation

Presently in terms of item No. 4 of Schedule III to the Rules, ibid, remittance of donation exceeding US$ 5000 per remitter/donor per annum requires prior approval of the Reserve Bank. Further, in terms of A. P. (DIR Series) Circular No. 25 dated March 1, 2002, Indian corporates with proven track record desiring to contribute funds from their foreign exchange earnings for setting up chairs in educational institutions outside India and similar such purposes are required to obtain prior approval of Reserve Bank.

To further liberalise the procedure and provide greater flexibility, AD Category-I banks are now permitted to make remittances on account of donations by corporates for specified purposes as under :

  1. Creation of chairs in reputed educational institutes;

  2. Donations to funds (not being an investment fund) promoted by educational institutes; or

  3. Donation to a technical institution or body or association in the field of activity of the donor company.

The remittances are subject to a limit of one per cent of the foreign exchange earnings during the previous three financial years or US$ 5 million, whichever is less.

Applications for remittances for purposes other than those specified above may be forwarded to the Chief General Manager, Reserve Bank of India, Central Office, Foreign Exchange Department, Foreign Investments Division (EPD), Central Office Building, Mumbai-400 001, together with (a) details of their foreign exchange earning during the last 3 years, (b) brief background of the company’s activities, (c) purpose of the donation and (d) likely benefits to the corporate.

The existing facility for remittance up to US$ 5000 per remitter / per donor per financial year towards donations by Indian corporates would continue as hitherto.

(A.P. (DIR Series) Circular No. 45/2006-07-RB dated 30th April 2007)
 

7.2 Remittance for consultancy services – Liberalisation

Presently, prior approval of the Reserve Bank is required for drawing foreign exchange ‘for remittance exceeding US$ 1,000,000 per project, for any consultancy service procured from outside India [item 15 of Schedule III to the Foreign Exchange Management
(Rule 5 of Current Account Transactions) Rules, 2000].

With a view to further liberalise the procedure and provide greater flexibility, it has been decided to raise the limit for remittance for consultancy service procured from outside India by Indian companies
executing infrastructure projects from USD 1 million per project up to US$ 10 million per project.

For this purpose, infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) seaport and airport, (vi) industrial parks, and (vii) urban infrastructure (water supply, sanitation and sewage projects). Accordingly, AD Category – I banks may allow remittances on behalf of Indian companies in such cases up to US$ 10 million per project, after verifying the bonafides of the transaction.

In all other cases, the existing limit of US$ 1 million, per project, for any consultancy service procured from outside India, will continue.

(A.P. (DIR Series) Circular No. 46/2006-07-RB dated 30th April, 2007)
 

7.3 Reimbursement of pre-incorporation expenses – Liberalisation

Presently, prior approval of the Reserve Bank is required for drawing foreign exchange for remittance exceeding US$ 100,000 by an entity in India by way of reimbursement of pre-incorporation expenses [Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000]

In order to liberalise the procedure further and providing greater flexibility, it has been decided to allow remittance of foreign exchange towards reimbursement of pre-incorporation expenses incurred in India up to 5 per cent of the investment brought into India or US$ 100,000, whichever is higher, on the basis of certification from statutory auditors.

(A.P. (DIR Series) Circular No. 47/2006-07-RB dated 30th April, 2007)

  1. pening of foreign currency accounts in India by ship-manning/crew-management agencies

    Presently vide Notification No. FEMA 10/2000-RB dated May 3, 2000 general permission is available to a shipping or airline company, incorporated outside India or its agent in India to open, hold and maintain a foreign currency account with an AD Category – I bank in India for meeting the local expenses in India of such shipping or airline company.

    It has now been decided to allow ship manning / crew managing agencies that are rendering services to shipping companies incorporated outside India, to open foreign currency accounts in India. Accordingly, AD Category – I banks may allow ship-manning /crew managing agencies in India to open and maintain non-interest bearing foreign currency accounts in India for the purpose of undertaking transactions in the ordinary course of its business, as detailed below :

  1. Credits to such accounts would be only by way of inward remittances through normal banking channels from the overseas principal.

  2. Debits will be towards various expenses in connection with the management of the ships/crew in the ordinary course of its business.

  3. No credit facility (fund based or non-fund based) should be granted against security of funds held in the account.

  4. The bank should meet the prescribed Reserve Requirements in respect of such accounts.

  5. No EEFC facility should be allowed in respect of the remittances received in the account.

  6. The account will be maintained only during the validity period of the agreement.

(A.P. (DIR Series) Circular No. 48/2006-07-RB dated 30th April, 2007)

  1. Certain Important Announcements made by RBI in its Annual Policy Statement for the year 2007-08 which are yet to be notified

    RBI Governor at the time of presentation of its Annual Policy Statement for the financial year 2007-08 has made certain announcement for amendment to FEMA which are yet to be notified :–

  1. Overseas investment limit (total financial commitments) for Indian companies enhanced to 300 per cent of their net worth.

  2. Listed Indian companies limit for portfolio investment abroad in listed overseas companies enhanced to 35 per cent of net worth.

  3. Aggregate ceiling on overseas investment by mutual funds enhanced to US $ 4 billion.

  4. Present limit for individuals for any permitted current or capital account transaction increased from US $ 50,000 to US $ 100,000 per financial year in the liberalised remittance scheme
 

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