Recent FEMA updates by RBI
Rollover of Guarantee given to JV/WOS incorporated outside India

The Reserve Bank of India, vide A. P (DIR Series) Circular No. 83 dated 3rd January, 2014 has amended the Overseas Direct Investment guidelines and has decided not to consider the renewal/rollover of an existing/original guarantee as a fresh financial commitment. Therefore, rollover of the guarantee shall not be required to be reported as a fresh guarantee, subject to the fulfillment of the following conditions: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.

It is further mentioned that in case any of the above condition is not complied with by the company then the company shall obtain the prior approval of the Reserve Bank of India for rollover of the exiting guarantee.
Given the last reduction in ODI remittance limits, this is a welcome move to enhance remittance ability of Indian companies to set up WOS/ joint ventures abroad.

Clarification on Issue of non convertible / redeemable bonus preference shares or debentures

As per the extant guidelines equity shares, compulsorily and mandatorily convertible preference shares and compulsorily and mandatorily convertible debentures are the only instruments that are treated as a part of share capital for the purpose of Foreign Direct Investment. However, RBI has been granting permission for issuance of non-convertible/ redeemable bonus preference shares or debentures to non-resident shareholders from the general reserve under a Scheme of Arrangement approved by a Court, under the provisions of the Companies Act on a case to case basis.

The RBI, in order to rationalize and simplify the procedure of such issuance being approved through a Scheme of Arrangement by the Court, has vide RBI/2013-14/428, A.P. (DIR Series) Circular No. 84 dated January 6th, 2014 allowed the Indian companies to 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. The issuance is subject to no-objection from the Income Tax authorities.

Definition of Infrastructure sector under ECB Liberalized

For the purpose of utilizing the ECB proceeds, the RBI has specified some specific sectors and infrastructure sector is one of them. As per the existing definition of Infrastructure includes following sectors: Power, Telecommunication, Railways, Road including bridges, Sea port and airport, Industrial parks, Urban infrastructure (water supply, sanitation and sewage projects), Mining, exploration and refining, and Cold storage or cold room facility, including farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat.

The RBI vide its A. P. (DIR Series) Circular No. 85 dated 6th January, 2014 has expanded the definition of Infrastructure sector by adding one more services namely Maintenance Repairs and Overhaul (“MRO”) as a part of airport infrastructure. MRO is the blanket term for all the services relating to assuring aircraft safety and airworthiness.

Conversion of External Commercial Borrowings and Lump sum Fee/Royalty into Equity

As per the extant ECB regulations, the company that has raised funds through ECB is allowed to convert the same into the equity subject to the fulfillment of following conditions:

  1. The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable.
  2. The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
  3. Pricing of shares is as per the pricing guidelines issued under FEMA, 1999.

At the time of conversion of ECB and for complying with the third condition as specified above, doubts have been expressed as to what exchange rate should be applied and what should be the date of conversion.

For the removal of the doubts, the RBI has vide A. P (DIR Series) Circular No. 94 dated 16 th January, 2014 clarified that the exchange rate for conversion shall be taken of the rate on the date of agreement between the parties concerned for such conversion. Although, borrower may issue equity shares for rupee amount less than the amount arrived at through exchange rate of the date of such conversion agreement and RBI shall have no objections to such issuance at lower price. RBI has further clarified that the fair value of the equity shares shall be worked out with reference to the date of conversion only.

Amendment in FDI form FC-GPR

The RBI has vide A.P. (DIR Circular) No. 102, dated 11th February 2014, amended the Form FC-GPR required to be filed for reporting issue of shares by the Indian investee company to foreign investor, requiring mention of investee company’s incorporation details as well of status of investment, viz. Greenfield vis-à-vis Brownfield.

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