As part of its annual exercise, the Reserve Bank of India (‘RBI”) has consolidated its notifications and circulars and issued updated master circulars as on July 1, 2014. Please find below a snapshot of the important changes as reflected in the master circulars referred to below, along with few of the other changes provided in recent circulars. This is the second in a series of regulatory updates to be circulated by ELP on the said master circulars.
- MASTER CIRCULAR ON GUARANTEES AND CO-ACCEPTANCES
The Master Circular on Guarantees and Co-Acceptances (“Master Circular on Guarantees”) has introduced the following changes:
Guidelines for Conduct of Guarantee Business
As a precaution for averting bank frauds, RBI has introduced a more stringent measure stipulating that if banks issue guarantees on behalf of customers who do not enjoy credit facilities with them, RBI may consider penalising such banks. This move has been introduced with the intention of ensuring that credit discipline is not vitiated. However, it would be necessary to ascertain if the same could amount to a restrictive trade practice as customers are necessarily required to enjoy ‘credit facilities’ with banks in order to be able to avail of bank guarantees. A customer holding deposits with a bank may be unable to obtain a guarantee in light of the above.
Guarantees for Export Advance
Over the past few years, RBI has made a concerted effort to promote exports and provide support to Indian exporters. In line with the same, banks were permitted to issue guarantees on behalf of exporters in order to facilitate execution of export contracts. However, RBI has noted that in certain cases, such guarantees were being used for repayment of loans availed of from Indian banks. In order to check such misuse, RBI has advised banks to desist from such practices so as to ensure that the guarantees are utilised for the purpose for which they were furnished. While maintaining its focus on exports, RBI has taken this step to ensure that such guarantees are utilised only for the purpose for which RBI intended them to be granted i.e. for promotion of exports.
Trade Credits for imports into India
AD Banks are now required to furnish information regarding the guarantees, letter of credits, etc. issued by all its branches in the Extensible Business Reporting Language (XBRL) platform in accordance with a circular dated November 19, 2013.
Guarantees for non-residents
With an intention to provide operational flexibility and to ease the procedure, AD Banks are now permitted to issue bank guarantees on behalf of a non-resident acquiring shares or convertible debentures of an Indian company through open offers, delisting or exit offers, without RBI approval, subject to the following:
- the transaction should be in compliance with the provisions of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations;
- the guarantee should be covered by a counter guarantee of a bank of international repute.
The guarantee will be valid for a tenure co-terminus with the offer period. Upon invocation of such guarantees, AD Banks are required to submit to the Chief General Manager-in-Charge, Foreign Exchange Department, RBI, a report on the circumstances leading to the invocation of the guarantee.
These changes were brought in effect from September 5, 2013. Credit support for acquisition of shares has been a sensitive issue for a while now and this bold and forward looking step by RBI has finally settled the matter. This move will encourage foreign investors to take more investment positions in Indian markets and will act as a stimulus for the standstill equity markets.
Rollover of Guarantees
The Master Circular on Guarantees stipulates that a rollover of an existing guarantee may not be treated as a fresh financial commitment in case certain conditions are met. Please see Part 1 of our Regulatory Update Series on the same.
Fund or Non-Fund based Credit Facilities to Overseas Joint Ventures / Wholly Owned Subsidiaries
Banks including overseas branches / subsidiaries of Indian banks are no longer permitted to issue standby letters of credit / guarantees / letter of comforts etc. on behalf of overseas JV / WOS / Wholly Owned Step Down Subsidiaries of Indian companies for the purpose of raising loans / advances of any kind from other entities except in connection with the ordinary course of overseas business. Banks are further required to monitor the end use of such fund or non-fund based credit facilities granted and their conformity with the business needs of such entities.
These steps have been brought in force by RBI from April 22, 2014 to put a check on the practices of companies using such facilities granted for facilitating their overseas business to avail foreign currency loans for repayment of rupee loans and other purposes not connected with their business overseas. It is pertinent to note that there needs to be more clarity as to what would qualify as ‘overseas business’ in the RBI’s view in order to enable JV/WOS to avail such fund or non-fund based facilities.
Non-resident Guarantee for Non-fund based Facilities entered between Two Resident Entities
RBI has granted general permission to non-residents to furnish guarantees for non-fund based facilities (such as letters of credit, guarantees or letters of comfort) entered into between two persons resident in India in line with a circular issued by RBI on August 29, 2012.
- MASTER CIRCULAR ON COMPOUNDING OF CONTRAVENTIONS UNDER FEMA, 1999
With a view to make the process of compounding more convenient, the Master Circular on Compounding of Contraventions under the Foreign Exchange Management Act, 1999 (“Master Circular on Compounding”) has brought about the following changes:
Delegation of Powers
In order to aid operational convenience, the Master Circular on Compounding now enables the Regional Offices of RBI to compound the following contraventions as well:
- Violation of pricing guidelines for issue of shares.
- Issue of ineligible instruments such as non-convertible debentures, partly paid shares, shares with optionality clause, etc. under the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000.
- Issue of shares without approval of RBI or Foreign Investment Promotion Board respectively.
Except the Kochi and Panaji Regional Offices (can only compound contraventions below Rs. 1 crore), all the Regional Offices can compound the contraventions mentioned above without any limit.
This delegation is in line with a circular issued by RBI on April 4, 2014 and will ensure greater ease to persons willing to opt for compounding under the Foreign Exchange Management Act, 1999.
Pre-requisites for compounding process
Considering the fact that RBI receives a number of compounding applications which have to be returned due to lack of proper approvals or permissions and with a view to expedite the process of refunding the compounding fees for such returned applications, RBI has stipulated that the refund will be credited to the applicant’s account through NEFT. Thus, the applicants now need to furnish their mandate and details of their bank account in the prescribed format.
Applicants are also required to furnish their Income Tax- PAN card, without which the application will be treated as incomplete. These changes were made effective from August 12, 2013.
- MASTER CIRCULAR ON ESTABLISHMENT OF BRANCH/ LIAISON/ PROJECT OFFICES IN INDIA BY FOREIGN ENTITIES
The Master Circular on Establishment of Liaison/ Branch / Project Offices in India by Foreign Entities has brought about the following changes:
Transfer of assets of Liaison Office/ Branch Office/ Project Office
In order to smoothen the process of opening and closing of Liaison Office (“LO”)/ Branch Office (“BO”)/ Project Office (“PO”), RBI has by a circular dated June 12, 2014, authorized AD Banks to approve transfer of assets of such offices subject to compliance with the following stipulations:
- Such proposals will be considered only from LO/BOs which are adhering to the operational guidelines stipulated by RBI.
- A certificate from the statutory auditor furnishing details of assets to be transferred. The sale consideration should not be more than the book value in each case.
- The assets should have been acquired by the LO/BO/PO from inward remittances and no intangible assets such as goodwill, pre-operative expenses should be included. No revenue expenses such as leasehold improvements incurred by LO/BOs can be capitalised and transferred to JV/WOS.
- Transfer of assets is to be allowed by AD Banks only when the foreign entity intends to close their LO/BO/PO operations in India.
- Credits to the bank accounts of LO/BO/PO on account of such transfer of assets will be treated as permissible credits.
General Permission for Establishment of Liaison Office/ Branch Office / Project Office
Vide a circular dated January 15, 2014, RBI clarified that entities or persons resident in Hong Kong and Macau willing to establish a LO/BO/PO in India will need to seek prior approval from RBI regarding the same.
- MASTER CIRCULAR – EXPOSURE NORMS
The significant change brought about by the Master Circular on Exposure Norms relates to exposure of banks to capital markets.
Limits on Banks’ Exposure to Capital Markets
In February 2014, RBI permitted equity shares to be issued to lenders in case of restructuring of dues of listed companies in order to compensate for their loss. In furtherance of the same, RBI has now stipulated that if such acquisition of equity shares by a bank in a listed company under a restructuring process results in exceeding the extant regulatory Capital Market Exposure (CME) limit, the same will not be considered as a breach of regulatory limit. However, this will require reporting to RBI and disclosure by banks in the Notes to Accounts in Annual Financial Statements. Considering the rise in restructuring of debts in the recent past, this move by RBI is a welcome change.
Disclaimer: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or corporate body. No person should act on such information without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/ quasi judicial authorities may not take a position contrary to the views mentioned herein.