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 first in a series of regulatory updates to be circulated by ELP on the said master circulars.
- MASTER CIRCULAR ON EXTERNAL COMMERCIAL BORROWINGS AND TRADE CREDITS
India has had a turbulent couple of years with the near flat line growth, burgeoning inflation and significant volatility of the rupee. This amongst other factors has led to a hardening of sentiment towards foreign investment inflows into India.
With the reasonable reduction in the current account deficit, RBI with the intention to encourage greater flow of foreign funds into India by way of external commercial borrowing (“ECB”) amongst others has brought about a slew of changes to provide the required impetus. The primary thrust of these changes has been to expand the scope of ECBs- who can borrow, from whom it can be borrowed, the purpose for which it can be borrowed. Following are the significant changes that have been introduced under the Master Circular on External Commercial Borrowings and Trade Credits (“ECB Master Circular”):
Impetus to infrastructure sector:
In keeping up with the RBI’s intent to encourage foreign investment/participation in infrastructure in India, the RBI has brought about certain proactive changes. The definition of ‘infrastructure sector’ has been widened to broaden the scope of infrastructure lending. NBFCs-Infrastructure Finance Companies (NBFC-IFCs) are now permitted to avail of ECBs for on-lending to the infrastructure sector and NBFCs-Asset Finance Companies (NBFC-AFCs) are permitted to avail of ECBs for financing the import of infrastructure equipment for leasing to infrastructure projects. Under the approval route, Holding Companies/Core Investment Companies are permitted to raise ECB for use in their Special Purpose Vehicles (SPVs) engaged in the infrastructure sector.
Broadening the scope of ECBs
Broadening the base of eligible ECB borrowers, RBI has now permitted corporate entities in the services sector (viz. hotels, hospitals and software sector) and in the miscellaneous sector (companies engaged in training activities excluding educational institutes, research and development activities and companies supporting infrastructure sector) to avail of ECBs. Further, under the approval route, ECB is now allowed for import of services, technical know-how and payment of license fees.
ECB from Foreign Equity Holder
Recognizing that the cost of equity is a major deterrent towards capitalization of the investments of foreign equity holders in India, RBI has relaxed norms for borrowing from foreign equity holders. RBI has allowed ECB from indirect equity holders provided the indirect equity holding by the lender in the Indian company is at least 51 per cent and also ECB from a group company provided both the borrower and the foreign lender are subsidiaries of the same parent.
Firms in the manufacturing, hospitals, infrastructure, hotels, and software sectors are now allowed to raise foreign capital from foreign/indirect equity holders for general corporate purposes (which include working capital expenses) under the automatic route. Other eligible borrowers would require the approval of RBI. This definitely makes it easier for foreign equity holders to put in money into their Indian subsidiaries with a greater convenience of retrieving their investments.
Repayment of Rupee Loans
Indian companies in manufacturing, infrastructure sector and hotel sector which have established Joint Venture (JV) /Wholly Owned Subsidiary (WOS) / have acquired assets overseas can avail ECB for repayment of term loans and rupee loans availed from Indian banks.
However, it is to be noted that overseas branches / subsidiaries of Indian banks are not recognised as lenders in case the end use is repayment / refinance of rupee loans raised from domestic banking system under any of the schemes under the ECB Master Circular. We would understand this as a measure to keep Indian banks’ balance sheets, onshore and offshore, available for fresh participation instead of churning the old loans within the Indian banking system. This is unlikely to impact foreign banks refinancing the loans of their Indian branches.
- MASTER CIRCULAR ON DIRECT INVESTMENT BY RESIDENTS IN JOINT VENTURE (JV) /WHOLLY OWNED SUBSIDIARY (WOS) ABROAD
The following are the significant changes that have been introduced with regards to overseas direct investment pursuant to the Master Circular on Direct Investments by Residents in Joint Ventures or Wholly Owned Subsidiaries Abroad (“ODI Master Circular”):
The definition of ‘Indian Party’ under the ODI Master Circular now covers Limited Liability Partnerships (LLPs) as well (pursuant to a circular issued by RBI in May 2014). Permitting LLPs to invest in JV/WOS abroad is a welcome change.
Overseas Direct Investment/ Financial Commitment – Restoration of Limit
Vide circular issued by the RBI on July 3, 2013 (post the ODI Master Circular), RBI has restored the limit of the overseas direct investment or financial commitment that can be undertaken by an Indian Party under the automatic route to 400% of the net worth of the Indian Party as per its last audited balance sheet. The imposition of the limit of 100% was seen as a temporary fiscal measure to limit the outflow of foreign exchange in the volatile period. With reasonable stability being achieved by the rupee, this fiscal measure has been discontinued.
However, for financial commitments exceeding USD 1 billion, prior approval from the RBI would be required even if the total financial commitment of the Indian Party is within 400% of its net worth as stipulated above.
This has brought investors back to the position prevailing prior to August 14, 2013 and will thereby promote global business to a large extent. This move by the RBI is likely to further outbound investments.
Overseas Direct Investment in Equity Shares and CCPS
Resident individuals, single or in association with another resident individual or with an Indian Party have been permitted to make overseas direct investment in equity shares and compulsorily convertible preference shares of a JV/WOS outside India with effect from August 5, 2013 within the overall limit prescribed under the Liberalised Remittance Scheme.
Such a resident individual however, ought to satisfy the inter alia the following criteria:
- the JV/WOS should be engaged in bona fide business activity and should not be in the real estate business or banking business or business of financial services activity;
- the permissible ceiling shall be within the overall ceiling prescribed for the resident individual as prescribed by the RBI from time to time;
- the JV or WOS, to be acquired / set up by a resident individual shall be an operating entity only.
Such investments are also subject to further terms and conditions laid down in the ODI Master Circular such as requirement to file Form ODI and report any alteration in the shareholding pattern of the JV/WOS within 30 days. Disinvestment is allowed only post one year from the date of the first remittance made to set up or acquire the JV/WOS abroad.
Rollover of Guarantees
The ODI Master Circular stipulates that a rollover of an existing guarantee will not be treated as a fresh financial commitment in case the following conditions are met:
- the existing guarantee was issued in terms of the then prevailing foreign exchange guidelines;
- there is no change in the end use of the guarantee;
- there is no change in any of the terms & conditions of the guarantee except the validity period;
- the reporting of the rolled over guarantee would be done as a fresh financial commitment;
- 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.
If the above conditions are not met prior approval of the RBI will be required. With respect to the conditions as stated above we would need to understand the need to report the rolled over guarantees as fresh financial commitment as provided above. This may be needed to be clarified as Part II of Form ODI (Clause (h)) uses the tem that details of ‘Fresh / Existing Guarantee Period Extended’ have to be provided.
These changes are in line with a circular issued by the RBI on January 3, 2014. The provisions are good from both the investors perspective as, if the conditions stipulated above are met a renewal of an existing guarantee will not be treated as a fresh commitment and from the regulator’s perspective as they ensure that even existing guarantees are compliant with foreign exchange laws.
Further, there is a stipulation that financial commitment funded by way of ECB raised by the Indian Party as per the extant ECB guidelines will also be subject to the ODI limits.
Filing of Form ODI
The Annual Performance report is now to be submitted online by June 30th every year.
- MASTER CIRCULAR ON REMITTANCE FACILITIES FOR NON-RESIDENT INDIANS / PERSONS OF INDIAN ORIGIN / FOREIGN NATIONALS
With regards to the Master Circular on Remittance Facilities for Non-Resident Indians/ Persons of Indian Origin/ Foreign Nationals (“Master Circular on Remittances”), the following changes have been brought about by the RBI:
Remittance of current income:
AD Banks can permit repatriation of current income of NRIs who do maintain a NRO Account in India, subject to payment of applicable taxes as prescribed by the Central Board of Direct Taxes. The requirement of providing a certificate from a chartered accountant stating that the amount proposed to be remitted is eligible for remittance and that applicable taxes have been paid or provided for has been done away with.
Facilities for Students:
As opposed to the USD 200,000 limit provided earlier for remittances under the Liberalised Remittance Scheme, students will now be eligible to receive remittances from India up to the limits that may be prescribed under the Liberalised Remittance Scheme.
Income Tax Clearance:
The Master Circular on Remittances has done away with the requirement of furnishing a certificate from a chartered accountant. In lines of the circular issued by RBI on June 30, 2014 regarding deduction of tax at source with regards to remittances to non-residents, RBI has stipulated that no instructions will be issued by RBI clarifying any tax issues. AD Banks will however be mandatorily required to comply with the applicable tax laws.
- MASTER CIRCULAR ON MISCELLANEOUS REMITTANCES FROM INDIA – FACILITIES FOR RESIDENTS
Liberalised Remittance Scheme
In line with the circular issued by RBI on June 3, 2014, the Master Circular on Miscellaneous Remittances from India – Facilities for Residents (“Master Circular on Miscellaneous Remittances”), has permitted remittances up to USD 125,000 by resident individuals. The above mentioned limit will also include remittances towards gift and donation by a resident individual.
The rupee gift or loan made to a NRI/PIO by a resident also ought to be within the overall limit of USD 125,000 per financial year.
Remittances for Acquisition of Immovable Property
The Liberalised Remittance Scheme will not available for remittances for acquisition of immovable property directly or indirectly outside India with effect from August 14, 2013. Residents who have entered into such contracts prior to August 14, 2013, may be permitted to make such remittances within the annual limit of USD 125,000 subject to the satisfaction of the AD Bank regarding the genuineness of the transaction. Further, AD Banks are to report such cases to RBI post facto.
Acquisition of Shares
Residents are free to acquire shares of any companies outside India as opposed to only listed companies under the earlier position.
The Liberalised Remittance Scheme can be used for setting up joint ventures or wholly owned subsidiaries abroad with effect from August 5, 2013.
Furnishing of information by AD Banks
In line with the circular issued by RBI on May 23, 2013, the requirement of submission of hard copies of monthly statements by AD Banks regarding Liberalised Remittance Scheme data has been done away with