GUIDELINES

ON

EXTERNAL COMMERCIAL BORROWINGS
POLICIES & PROCEDUR

GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF ECONOMIC AFFAIRS

GOVERNMENT OF INDIA

MINISTRY OF FINANCE
DEPARTMENT OF ECONOMIC AFFAIRS

(EXTERNAL COMMERCIAL BORROWINGS DIVISION)

GUIDELINES 

ON 

POLICIES & PROCEDURES FOR EXTERNAL COMMERCIAL BORROWINGS

P R E F A C E

External commercial Borrowings  (ECBs) are a key component of India’s overall debt.  Policy on External commercial Borrowings (ECB) is framed by the Government of India in consultation with RBI. For the convenience of investors and borrowers, Government   bring out the consolidated ECB Guidelines in the form of a brochure and this is the fifth publication in the series. The last consolidated ECB Guidelines were brought out in July, 1999. This brochure includes changes in the ECB Guidelines for the year 2005-2006.

The important aspect of ECB policy is to provide flexibility in borrowings by Indian corporates, at the same time maintaining prudent limits for total external borrowings.  The guiding principles of ECB policy are to keep borrowing maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall    growth of the economy.

Government has been streamlining / liberalising ECB procedures in order to enable Indian corporates, to have greater access to international financial markets.  Government has now empowered Reserve Bank of India to give ECB approvals in accordance with the guidelines brought out by the RBI.  Corporates are eligible to raise ECB  for investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is also permitted to obtain credit enhancements from international banks/international financial institutions/joint venture partners for their domestic rupee denominated borrowing under structural obligations scheme with the approval of RBI.  ECB proceeds can also be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad;  The ECB guidelines are regularly reviewed in consultation with the Reserve Bank of India (RBI) keeping in view the current macroeconomic situation and in consistence with prudent debt management.. The Government last amended the policy on External Commercial Borrowings (ECB)  in March, 2005 in the background of developments in recent months.  Accordingly, this brochure contains the consolidated guidelines including recent changes in the policy.

( U.K. Sinha )
                                  Joint Secretary to the Government of India)
                                           Department of Economic Affairs
                                                                     Ministry of Finance

New Delhi
October 21, 2005

Guidelines on Policies and Procedures for
External Commercial Borrowings for 2005-2006

ECB POLICY:

1. External Commercial Borrowings (ECBs) are defined to include commercial bank   loans, buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and  commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc   

2. ECBs are being permitted as an additional source of finance to augment the resources available domestically to Indian corporates for financing import of capital goods, new projects, modernization/expansion of existing production units in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India.

3. External Commercial Borrowings are approved within an overall annual ceiling, consistent with prudent debt management. 

4 The policy also seeks to give greater priority for projects in the infrastructure and  core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Financial Institutions dealing exclusively with infrastructure or export finance through their sub-lending against the ECB approvals are also  expected to give priority to the needs of medium and small scale units.

5. Applicants will be free to raise ECB from any internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. Offers from Non-recognized sources will   not be entertained.

6.  ECB can be accessed under two routes, namely, (a) Automatic Route  and (b) Approval Route.  

(a). AUTOMATIC ROUTE:

ECB for investment in the real sector - industrial sector, especially infrastructure sector in India – is under the Automatic Route, i.e. will not require RBI / Government approval. The maximum amount of ECB which can be raised by an eligible borrower under the Automatic Route is USD 500 million during a financial year.  However, NGOs engaged in micro-finance activities have been permitted to raise ECB up to USD 5 million during a financial yearn for permitted end use.

In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route.

(b)  APPROVAL ROUTE:

All cases which fall outside the purview of the automatic route, will be decided by an Empowered Committee set up by RBI  

ELIGIBLE BORROWERS

7.  Automatic route:

(i).Corporates registered under the Companies Act, 1956 [except financial intermediaries, such as banks, financial institutions (FIs) & housing finance companies],   are eligible. 
(ii).      NGOs engaged in micro-finance activities are eligible to avail ECB.   Such NGOs should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange, as per detailed guidelines issued by RBI separately in this regard.

(iii)  Individuals, Trusts and non-profit making organizations, [ except NGOs engaged in micro-finance activities as mentioned in paragraph 6(a) & 7(ii) above ] are not eligible to raise ECB.

8.  Approval Route:
(i)    Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON, EXIM Bank etc. will be considered under approval route on a case by case basis. 

(ii) Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted under approval route to the extent of their investment in the package and assessment by RBI based on prudential norms. Any ECB availed for this purpose so far will be deducted from their entitlement.

(iii) NBFCs will be permitted to raise ECB under the Approval Route from multilateral financial institutions, reputed regional financial institutions, official export agencies and international banks towards import of infrastructure equipment for leasing to infrastructure projects with a minimum average maturity of 5 years.

(iv) Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies with strong financials satisfying criteria  notified by RBI, will be permitted under the Approval Route.

(v) Cases falling outside the purview of the automatic route limits.  

RECOGNIZED LENDERS
9. Borrowers can raise ECB from internationally recognized sources such as (i) international banks, international capital markets, multilateral financial institutions (such as IFC, ADB, CDC etc.,), (ii) export credit agencies and (iii) suppliers of equipment, foreign collaborators and foreign equity holders. 

However, eligible NGOs engaged in micro-finance activities may raise ECB to the extent of their entitlement  from overseas organizations and individuals also complying with specific safeguards notified by RBI.  But individual lenders from countries wherein banks are not required to adhere  to Know Your Customer (KYC) guidelines will not  be  permitted  to  extend ECB.

Further, it is clarified that where a ‘foreign equity holder’ is a foreign lender for ECB,   would  require minimum equity participation  (in the capacity of equity holder)  in the domestic entity / borrower’s company  as follows:

• ECB up to USD 5 million. – minimum equity of 25% held directly  by overseas lender; and
• ECB more than USD 5 million – minimum equity of 25% held directly  by lender and  debt-equity ratio of not exceeding 4:1 (i.e. the proposed ECB not exceeds 4 times the direct foreign equity holding).
• Where  the debt equity ratio exceeds 4:1 ( i.e. the proposed ECB exceeds 4 times the direct foreign equity holding) such cases will be considered by RBI under the approval route.

AVERAGE MATURITY FOR ECBs

10. ECBs should have the following minimum average maturities:

(a) ECB up to USD 20 million or equivalent with minimum average maturity of three years 
(b) ECB above USD 20 million or equivalent with minimum average maturity of five years
(c )   ECB up to USD 20 million or equivalent can have call/put option provided the minimum average maturity of 3 years is complied before exercising call/put option.
 

 ALL-IN-COST CEILINGS

11. All ECBs are subject to the following minimum spreads over 6 months LIBOR for the respective currency of borrowing or the applicable benchmark(s) as the case may be:         

All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees.  Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. 

END-USE REQIREMENTS / RESTRICTIONS

12. Permissible end-use / restrictions are explained below:

(i) ECB can be raised only for investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) ports, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects);

(ii) ECB proceeds can be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

(iii) Utilisation of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.

(iv) NGOs engaged in micro finance activities can utilise ECB proceeds for lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building. 

(v) Utilisation of ECB proceeds is not permitted for on-lending or  investment in capital market or acquiring a company (or a part thereof) in India by corporates  except for banks,  financial institutions,  NBFCs and housing finance companies eligible under approval  route (as mentioned in paragraph 8  above).
 

• Utilisation of ECB  proceeds is not permitted in real estate. The term ‘real estate’ excludes development of integrated township as defined by Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, SIA (FC Division), Press Note 3 (2002 Series, dated 04.01.2002).

(vii) End-uses of ECB for working capital, general corporate purpose and repayment of existing Rupee loans are not permitted.

(viii) NBFCs can utilise ECB proceeds towards import of infrastructure equipment for leasing to infrastructure projects. 

(ix) Housing Finance Companies with strong financials can utilise FCCB proceeds for meeting their housing finance requirements.  

GUARANTEES

13. Issuance of Guarantee / standby letter of credit or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted.    However,   applications for providing guarantee / standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered by RBI   on merit subject to prudential norms.

SECURITY

14. The choice of security to be provided to the lender/supplier is left to the borrower.  However, creation of charge over immovable assets and financial securities, such as shares, in favour of overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000, dated May 3, 2000 as amended from time to time,  respectively.

PARKING OF ECB PROCEEDS OVERSEAS

15. ECB proceeds should be parked overseas until actual requirement in India. Corporate will be permitted to invest the ECB/FCCB proceeds parked abroad outside India in the following liquid assets:

(a) Deposits or Certificates of Deposits or other products offered by banks who have been rated not less than ‘AA(-)’ by Standard & Poor’s / Fitch IBCA or ‘Aa3’ by Moody’s; 

(b) Deposits with branch outside India of an authorized dealer in India;  and 

(c) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated at (a) above.

PREPAYMENT

16. Prepayment of ECB up to USD 200 million is allowed by authorized dealers (ADs) without prior approval of RBI, subject to compliance with the stipulated minimum average maturity period (3-5) as applicable to the loan.   However, prepayment of ECB for amounts exceeding USD 200 million or prepayment of ECBs with minimum average maturity  of less than the stipulated minimum average maturity period (3-5) as applicable to the loan would be considered by RBI under the approval route.

REFINANCE OF EXISTING ECB

17. Refinancing of existing ECB by raising fresh loans at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained.

DEBT SERVICING

18. The designated Authorized Dealers (AD) has the general permission to make remittances of installments of principal, interest and other charges in conformity with ECB guidelines issued by the Government / RBI from time to time.

PROCEDURE

19. Borrower may enter into loan agreement with recognized overseas lender for raising ECB under Automatic Route without prior approval of RBI. The borrower may note to comply with the reporting arrangement as mentioned in paragraph 26 below.  

. Under Approval Route, applicants are required to submit an application in  the format (ECB form) prescribed by RBI through designated AD to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central Office, External Commercial Borrowings Division, Mumbai – 400 001 along with necessary documents.

EXTERNAL COMMERCIAL BORROWINGS (ECBs)  BY THE   UNITS   IN SPECIAL ECONOMIC ZONES (SEZs).

20. Units in SEZ are permitted to raise ECB subject to the following conditions :

a) ECB is raised for their own requirement, and 

b) They shall not transfer or on-lend any borrowed funds to their sister concern or any other unit in Domestic Tariff Area (DTA).

STRUCTURED OBLIGATIONS

21. In order to enable corporates to hedge exchange rate risks and raise resources domestically, domestic rupee denominated borrowings under structured obligations would be permitted to be credit enhanced by international banks / international financial institutions / joint venture partners.  The liability of the Indian company shall be denominated in Indian Rupees and debt servicing in a post default situation may be done  in Rupees or in Forex as envisaged initially in the contract document. 

All such  cases will be considered by RBI under the approval route. 
 
 
FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBs)

22. The policy for ECB is also applicable to FCCBs in all respect, except in the case of Housing Finance Companies satisfying specific criteria notified by RBI. 

REPORTING ARRANGEMENTS AND DISSEMINATION OF INFORMATION

23. Reporting Arrangements

With a view to simplify the procedure, submission of copy of loan agreement is dispensed with.

(a) Borrowers are required to submit Form 83 (as prescribed by RBI), in duplicate, certified by the Company Secretary (CS) or Chartered Accountant (CA) to the designated AD. One copy is to be forwarded by the designated AD to the Director, Balance of Payments Statistics Division, Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051 for allotment of loan registration number. 

(b)  The borrower can draw-down the loan only after obtaining the loan registration number from DESACS, RBI.

(c) Borrowers are required to submit ECB-2 Return (as prescribed by RBI) certified by the designated AD on monthly basis so as to reach DESACS, RBI within seven working days from the close of month to which it relates. 

24. Dissemination of information

. For providing greater transparency, information with regard to the name of the borrower, amount, purpose and maturity of ECB under both Automatic Route and Approval Route are put on the RBI website on a monthly basis with a lag of one month to which it relates.

COMPLIANCE WITH ECB GUIDELINES

25. The primary responsibility to ensure that ECB raised / utilised are in conformity with ECB guidelines issued by Government of India as well as by the Reserve Bank  is that of the concerned borrower. Any contravention of ECB guidelines will be viewed seriously and may invite penal action.  The designated AD is also required to ensure that  raising /  utilisation of ECB is in compliance with ECB guidelines at the time of certification. 

CONVERSION OF ECB INTO EQUITY
26. Conversion of ECB into equity is permitted subject to the following conditions:
(a) The activity of the company is covered under the Automatic Route for FDI or Government approval for foreign equity in the company  has been obtained,

(b) The foreign equity after such conversion of debt into equity is within the sectoral cap, if any,

(c) Pricing of shares is as per SEBI and RBI guidelines / regulations in the case of listed / unlisted companies as the case may be.

However, import payables, deemed as ECB, would not be eligible for conversion into equity / preference shares.

ECB UNDER ERSTWHILE USD 5 MILLION SCHEME

• Designated ADs are permitted to approve elongation of repayment period for loans raised under the erstwhile USD 5 Million Scheme, provided there is a consent letter from the overseas lender for such reschedulement without any additional cost.  However in such cases, if the borrower seeks withholding tax exemption from the Government for such extension, they should get approval / acknowledgement from RBI  for such elongation / extension of repayment period before approaching the  Government for withholding tax exemption.

 
Such approval with existing and revised repayment schedule along with the Loan Key / Loan Registration Number should be initially communicated to the Chief General Manager, Foreign Exchange Department, Reserve Bank of India, Central Office, ECB Division, Mumbai within seven days of approval and subsequently in  format    ECB - 2.
CRYSTALLIZATION OF ECB LIABILITY 

28.       ADs desiring to crystallize their foreign exchange liability arising out of guarantees provided for ECB raised by corporates in India in to Rupees, may make an application to the Chief General Manager, Foreign Exchange Department, External Commercial Borrowings Division, Reserve Bank of India, Central Office, Mumbai, giving full details viz., name of the borrower, amount raised, maturity, circumstances leading to invocation of guarantee/letter of comfort, date of default, its impact on the liabilities of the overseas branch of the Authorized Dealer concerned and other relevant factors.

LIABILITY MANAGEMENT  

29. Corporates can undertake liability management for hedging the interest and/or           exchange rate risk on their underlying foreign currency exposure. Prior approval of Government or RBI has been dispensed with for concluding or winding up of the  following transactions:

  (i)     Interest rate swaps
  (ii)    Currency swaps
  (iii)   Coupon swaps
  (iv)   Purchase of interest rate caps/collars
  (v)   Forward rate agreements

Corporates may refer to RBI’s Circular No. A.D.(M.A. Series) Circular No. 12       dated   August 5, 1996.  . 

REVIEW

30. The ECB guidelines and procedures are reviewed periodically by the Government in consultation with RBI in the light of prudent management of external debt, changing market   conditions, sectoral  requirements etc.

Overseas Investment Policy  

Over the years, the liberalisation measures for overseas investment by Indian companies has continued. RBI vide their A.P.(DIR Series) Circular No.66 dated 13.01.2003 (in partial modification of Notification No. FEMA 19/2000-RB dated 3 rd May 2000 ) has liberalized the policy under automatic route:-

Corporates: - listed Indian companies are permitted to invest abroad in companies, (a) listed on a recognized stock exchange and (b) which has the shareholding of at least 10% in an Indian company listed on a recognized stock exchange in India (as on 1 st January of the year of the investment). Such investments shall not exceed 35% as of the Indian company's net worth, as on the date of latest audited balance sheet.

Individuals: - Reserve Bank of India, under the “Liberalized Remittance Scheme for Resident Individuals” permits resident individual to remit up to US $ 100,000 per financial year for any permitted current or capital account transactions or a combination of both, such as bank deposits, purchase of immovable property, investment in equity and debt abroad. Similarly, resident individuals are permitted to remit for current account transactions such as gift, donation, medical treatment, education, employment, emigration, import of medicines, books and periodicals subject to foreign trade policy.

Indian corporates / Registered partnership firms are allowed to undertake agricultural activities either directly or through an overseas branch.

The stipulation of minimum net worth of Rs.15 crores for Indian companies engaged in financial sector activities in India removed for investment abroad in the financial sector. However, an Indian party seeking to make investment in an entity engaged in the financial sector should also fulfill the following additional conditions:

be registered with the appropriate regulatory authority in India for conduction the financial sector activity;

have earned net profit during the preceding three financial years from the financial service activities;

have obtained approval for investment in financial sector activities abroad from regulatory authorities concerned in India and abroad; and

have fulfilled the prudential norms relating to capital adequacy as prescribed by the regulatory authority concerned in India .
Further liberalisation measures introduced in the fiscal year 2005-06 are as follows:-

Guarantees:- the scope of guarantee has been enlarged under the automatic route. Indian entities may offer any forms of guarantee i.e. corporate or personal/ primary or collateral/ guarantee by the promoter company/ guarantee by group company, sister concern or associate company in India , provided that: -

All "financial commitments" including all forms of guarantees are within the overall prescribed ceiling for overseas investment of the Indian party i.e. currently within 300% of the net worth of the investing company;

No guarantee is ‘open ended' i.e. the amount of the guarantee should be specified upfront; and

As in the case of corporate guarantees, all guarantees are required to be reported to Reserve Bank of India (RBI), in Form ODR.

Disinvestment:- in order to enable companies to have operational flexibility according to their commercial judgment, the automatic route of disinvestment has been further liberalized. Indian companies are permitted to disinvest without prior approval of the RBI in the following categories: -

In cases where the JV/WOS is listed in the overseas stock exchange;

in cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of less than Rs. 100 crore;

where the Indian promoter is an unlisted company and the investment in overseas venture does not exceed US$ 10 million.

Proprietorship concerns:- With a view to enabling recognized star exporters with a proven track record and a consistently high export performance to reap the benefits of globalisation and liberalization, proprietary/ unregistered partnership firms are allowed to set up a JV/WOS outside India with prior approval of RBI.

Investment Routes and Procedures
 
The Indian companies can directly invest outside India by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, signifying a long term interest in the overseas entity. It involves setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) abroad and does not include portfolio investment. A joint venture abroad means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and in which investment has been made by an Indian entity. While a wholly owned subsidiary abroad means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and whose entire capital is owned by an Indian entity.

Resident corporate entities and partnership firms registered under the Indian Partnership Act,1932 (Indian Party) are eligible to make direct investment abroad in JVs/ WOSs. Also, a firm or a company or a body corporate registered or incorporated in India as well as proprietary concerns are permitted to open overseas branch. Besides such direct investment, listed Indian Companies can invest upto 25% of the net worth in overseas companies, listed on a recognized stock exchange, that have at least 10% share in an Indian company listed on a recognized stock exchange in India as on 1st January of the year of investment or by way of rated debt securities issued by the same companies. However, this 10 % holding should be a direct holding and not through a subsidiary or a special purpose vehicle (SPV).

The proposal from Indian companies for overseas investment in Joint Ventures (JVs) and Wholly Owned Subsidiaries (WOSs) abroad are considered in terms of the guidelines issued in this regard by the Government from time to time. Under the guidelines, all applications for grant of approval for setting up joint ventures/wholly owned subsidiaries are to be made and processed by the Reserve Bank of India. There are two categories of applications for setting up overseas JVs and WOSs :-

Financing Overseas Investment
 
A business firm requires finance to commence its operations, to continue its operations and for its expansion and growth. Indian companies need financial support in order to make their investments abroad. There must be continuous flow of funds in and out of business. They need funds to meet their various capital requirements; to make equity participation in overseas ventures as well as to acquire foreign companies or businesses. Sound plans, efficient production and marketing are all dependent on smooth flow of finance.

Till 1990, the Government policies were not in favour of obtaining finance or capital from overseas markets and the Indian industry by and large could not take advantage of the availability of cheap finance from abroad. The rationale for raising capital (either as equity or debt) from abroad is the desire on the part of companies to tap low cost funds and broaden the shareholder's base. This also serves as a launching pad for future overseas operations such as opening of branches, acquiring assets abroad as well a expanding the business operations abroad.The issue of ordinary shares and foreign currency convertible bonds (FCCBs) began in 1992 with a Government notifying the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993

Paveterra FDI desk

It’s our business to provide special consultancy towards a wide spectrum of sectors concerning FDI in India.

As one of the countries best consultants our most effecient and very professional FDI desk helps investors to know more about our countries FDI Policy which mainly consists and compromises of the following procedures and points if an investor wishes to set up base or participate  in our country’s promising growth story.

   Procedure under automatic route
   Procedure under Government Approval
   Prohibited Sectors
   General permission of RBI under FEMA
   Industrial Licensing
   Procedure for obtaining an industrial license
   Small Scale Sector
   Locational restrictions
   Environmental Clearances
   Other approvals/clearances at State level

Policy on Foreign Direct Investment

India has one of  the most liberal, competitive  and transparent policies on FDI among all the major emerging economies. FDI up to 100% is allowed under the  automatic route in all activities/sectors except the following, which require prior approval of the Government:-

1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed.

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route, FDI could take place after taking necessary regulatory approvals form the state governments and local authorities for construction of building, water, environmental clearance, etc.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors.

Procedure under Government Approval

FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB).

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion.

Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI.


Prohibited Sectors

The extant policy does not permit FDI in the following cases:

i. Gambling and betting
ii. Lottery Business
iii. Atomic Energy
iv. Retail Trading
v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)

General permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do no require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors.

The companies are required to notify the concerned Regional Office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

Industrial Licensing

With progressive liberalization and deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. At present, industrial license is required only for the following: -

1. Industries retained under compulsory licensing
2. Manufacture of items reserved for small scale sector by larger units
3. When the proposed location attracts locational restriction

The following industries require compulsory license: -

I Alcoholics drinks
II Cigarettes and tobacco products
III Electronic aerospace and defense equipment
IV Explosives
V Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates of hydro carbon and derivatives

Procedure for obtaining an industrial license

Industrial license is granted by the Secretariat for Industrial Assistance in Department of Industrial Policy and Promotion, Government of India. Application for industrial license is required to be submitted in Form FC-IL to Department of Industrial Policy and Promotion.

Small Scale Sector

Ministry of Agro and Rural Industries and Ministry of Small Scale industries have been merged into a single Ministry, namely, Ministry of Micro, Small and Medium Enterprises.

Locational restrictions

Industrial undertakings to be located within 25 kms of the standard urban area limit of 23 cities having a population of 1 million as per 1991 census require an industrial license. Industrial license even in these cases is not required if a unit is located in an area designated as an industrial area before 1991 or non-polluting industries such as electronics, computer software, printing and other specified industries.

Environmental Clearances

Entrepreneurs are required to obtain Statutory clearances, relating to Pollution Control and Environment as may be necessary, for setting up an industrial project for 31 categories of industries in terms of Notification S.O. 60(E) dated 27.1.94 as amended from time to time, issued by the Ministry of Environment and Forests under The Environment (Protection) Act 1986. This list includes petrochemicals complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, papers etc.,

However, if investment in the project is less than Rs.1 billion (appox. $ 22.2 million), such Environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries.

Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range, coastal areas, Doon Valley, Dahanu etc.) are guided by separate guidelines issues by the Ministry of Environment and Forests.

Other approvals/clearances at State level
Land, Water, Electricity, Registrations etc.

Environmental Clearance (EC) Process in India are now a major clearance authority for a majority of FDI projects in India

RESERVE BANK OF INDIA
(EXCHANGE CONTROL DEPARTMENT)
CENTRAL OFFICE
MUMBAI  400 001

Notification No.FEMA 10 /2000-RB dated 3rd  May 2000

In exercise of the powers conferred by clause (b) of Section 9 and clause (e) of subsection (2) of Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank of India makes the following regulations for opening, holding and maintaining of Foreign Currency Accounts and the limits upto which amounts can be held in such accounts by a person resident in India, namely:

1. Short title and commencement :-

i)  These Regulations may be called the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2000.

ii)  They shall come into force on 1st day of June 2000.

2. Definitions :-

In these Regulations, unless the context otherwise requires, -

i)  ‘Act’ means the Foreign Exchange Management Act, 1999 (42 of 1999);

ii)  ‘Authorised dealer’ means a person authorised as an authorised dealer under subsection (1) of section 10 of the Act;

iii)  ‘Foreign Currency Account’ means  an account held or maintained in currency other than the currency of India or Nepal or Bhutan;

iv)  ‘Schedule’ means a schedule to these Regulations;

v)  the words and expressions used but not defined in these Regulations shall have the same meanings respectively assigned to them in the Act.

3. Restriction on holding foreign currency account by a person resident in India :-

Save as otherwise provided in the Act or rules or regulations made thereunder,  no person resident in India shall open or hold or maintain a Foreign Currency Account:

Provided that a Foreign Currency Account held or maintained before the commencement of these Regulations by a person resident in India with special or general permission of the Reserve Bank, shall be deemed to be held or maintained under these Regulations :

Provided further that the Reserve Bank, may on an application made to it, permit a person resident in India to open or hold or maintain a Foreign Currency Account, subject to such terms and conditions as may be considered necessary.

4. Opening, holding and maintaining an Exchange Earner’s Foreign Currency Account :-

A person resident in India may open, hold and maintain with an authorised dealer in India, a Foreign Currency Account to be known as Exchange Earner’s Foreign Currency (EEFC) Account, subject to the terms and conditions of the Exchange Earners’ Foreign Currency Account Scheme specified in the Schedule.

5. Opening, holding and maintaining a Resident Foreign Currency Account :-

(1) A person resident in India may open, hold and maintain with an authorised dealer in India a Foreign Currency Account, to be known as a Resident Foreign Currency (RFC) Account, out of foreign exchange –

(a) received as pension or any other superannuation or other monetary benefits from his employer outside India; or

(b) realised on conversion of the assets referred to in sub-section (4) of section 6 of the Act, and repatriated to India; or

(c)  received or acquired as gift or inheritance from a person referred to in sub-section (4) of section 6 of the Act; or

(d) referred to in clause (c) of section 9 of the Act, or acquired as gift or inheritance therefrom.

(2)  The funds in a Resident Foreign Currency Account opened or held or maintained in terms of sub-regulation (1) shall be free from all restrictions regarding utilisation of foreign currency balances including any restriction on  investment in any form, by whatever name called, outside India.

6. Opening, holding and maintaining a Foreign Currency Account in India in certain other cases :-

A shipping or airline company incorporated outside India or its agent in India may open, hold and maintain  a  Foreign Currency Account with an authorised dealer in India for meeting the local expenses in India of such airline or shipping company:

Provided that the credits to such accounts are only by way of freight or passage fare collections in India or by inward remittances through normal banking channels from its office outside India and, in the case of agent, from his principal outside India.

7. Opening, holding and maintaining a Foreign Currency Account outside India :-

(1) An authorised dealer in India may open, hold and maintain with his branch or head office or correspondent outside India, a Foreign Currency Account for the purpose of transacting foreign exchange business and other matters incidental thereto, in accordance with the provisions of the Act or the rules or regulations made or the directions issued thereunder.

(2) A branch outside India of a bank incorporated or constituted in India may open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of carrying on normal banking business outside India, subject to compliance with the directions or guidelines issued from time to time by the Reserve Bank, and the regulatory authority in the country where the branch is located.

(3) A shipping or airline company incorporated in India may open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of undertaking transactions in the ordinary course of its business.

(4) Life Insurance Corporation of India or General Insurance Corporation of India and its subsidiaries may open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of meeting the expenditure incidental to the insurance business carried on by them and for that purpose, credit to such account the insurance premia received by them outside India.

(5) A person resident in India, being an   exporter who has undertaken a construction contract or a turnkey project outside India or who is exporting services or engineering goods from India on deferred payment terms may open, hold and maintain a Foreign Currency Account with a bank outside India,  provided that  -

a) approval as required under the Foreign Exchange Management (Export of goods and services) Regulations, 2000 has been obtained for undertaking the contract/project/export of goods or services, and

b) the terms and conditions stipulated in the letter of approval have been duly complied with.

(6) A person resident in India who has gone abroad for studies or who is on a visit to a foreign country may open, hold and maintain a Foreign Currency Account with a bank outside India during his stay outside India, provided that on his return to India, the balance in the account is repatriated to India :

Provided that short visits to India by a person who has gone abroad for studies, before completion of his studies, shall not be treated as his return to India.

(7) A person resident in India who has gone out of India to participate in an exhibition/ trade fair outside India may open, hold and maintain a Foreign Currency Account with a bank outside India for crediting the sale proceeds of goods on display in  the exhibition/trade fair :

Provided that the balance in the account is repatriated to India through normal banking channels within a period of one month from the date of closure of the exhibition/trade fair.

8. Limit on holding in a Foreign Currency Account :-

Unless otherwise stipulated by the Reserve Bank, a person resident in India who has opened and is maintaining a Foreign Currency Account in accordance with the provisions of Regulations 6 and 7, may hold therein foreign exchange without any limit.

9. Types of accounts :-

A Foreign Currency Account with an authorised dealer in India under these Regulations may be opened, held and  maintained  -
1) in the form of current or savings or term deposit account in cases where the account holder is an individual, and in the form of current account or term deposit account in all other cases;

2)  singly or jointly in the name of  person eligible to open, hold and maintain such account.

10. Remittances out of the accounts after the account holder’s death :-

On the death of a foreign currency accountholder, -

1) the authorised dealer with whom the account is held or maintained may remit to a nominee being a person resident outside India, funds to the extent of his share or entitlement from the account of the deceased accountholder;

2)  a nominee being a person resident in India, who is desirous of remitting funds outside India out of his share for meeting the liabilities abroad of the deceased, may apply to the Reserve Bank for such remittance.

11. Responsibility of authorised dealers maintaining foreign currency  accounts :-

An authorised dealer maintaining foreign currency accounts shall -

1)  comply with  the directions issued by the Reserve Bank from time to time; and

2)  submit periodic return or statement, if any, as may be stipulated by the Reserve Bank .

( P.R. GOPALA RAO )
Executive Director

Published in the Official Gazette of Government
of India - Extraordinary - Part-II, Section 3,
Sub-Section (i) dated 05.05.2000 - G.S.R.No.393(E)

Schedule
(SeeRegulation 4)
Exchange Earner’s Foreign Currency (EEFC) Account Scheme

1. Limit up to which foreign currency may be credited to EEFC account

(1) A 100 per cent Export Oriented Unit or a Unit in (a) Export processing zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park may credit up to 70 per cent, and any other person resident in India may credit up to 50 per cent of  the following, to the EEFC Account, namely-

i)  inward remittance through normal banking channel, other than the remittance received pursuant to any undertaking given to the Reserve Bank or which represents foreign currency loan raised or investment received from outside India by the account holder;

ii)  payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area;

iii) payment received by an exporter from an account maintained with an authorised dealer for the purpose of counter trade, in accordance with the approval granted in terms of Regulation 14 of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000;

iv)  advance remittance received by an exporter towards export of goods or services;

v) payment received for export of goods and services from India, out of funds representing repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic Affairs, Moscow, with an authorised dealer in India;

Provided that the Reserve Bank may, on an application made to it and on being satisfied that it is necessary to do so, grant permission to hold higher percentage of inward remittance/payments in foreign exchange in the EEFC account.

(2) Except to the extent provided in sub-paragraph (1), no payment received in foreign exchange by the accountholder  from any other person resident in India, shall be credited to an EEFC account.

Explanation:

For the purpose of the sub-paragraph (1), payment received through an international credit card for which reimbursement will be provided in foreign exchange may be regarded as a remittance through normal banking channels.

2. Permissible credits to EEFC account

Following credits may be made to an EEFC Account, namely –

i)  A portion of inward remittance/payment received by the recipient in foreign exchange subject to the provisions of paragraph (1);

ii)  Interest earned on the funds held in the account;

iii)  Recredit of unutilised foreign currency earlier withdrawn from the account;

iv)  Amount representing repayment by the account holder’s importer customer, of loan/advances granted in terms of clause (iv) of Paragraph 3.

3. Permissible debits to the EEFC account

Following debits may be made to an EEFC Account, namely –

i)  Payment outside India towards a current account transaction in accordance with the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and towards a capital account transaction permissible under the Foreign Exchange Management (Permissible Capital Account Transactions)  Regulations, 2000.

ii)  Payment in foreign exchange towards cost of goods purchased from a 100 percent Export Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology park

iii)  Payment of customs duty in accordance with the provisions of Export Import Policy of Central Government for the time being in force.

iv)  Trade related loans/advances, not exceeding US $ 3 million, by an exporter holding such account to his importer customer outside India, subject to compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.

v)  Payment in foreign exchange to a person resident in India for supply of goods/services including payments for air fare and hotel expenditure.

4. Miscellaneous :-

i)  There is no restriction on withdrawal in rupees of funds held in an EEFC account.However, the amount withdrawn in rupees shall not be eligible for conversion into foreign currency and for recredit to the account.

ii) Authorised dealer may issue cheque books of separate series with  the superscription  “EEFC Account” to the account holders maintaining such accounts, and also satisfy himself while honouring the cheques that the payment made by the account holder by issue of a cheque is permissible under these Regulations.

RESERVE BANK OF INDIA
FOREIGN EXCHANGE DEPARTMENT
CENTRAL OFFICE
MUMBAI 400 001.

Notification No.FEMA.113/ 2004-RB
Dated 6 March 2004

Foreign Exchange Management (Foreign Currency Accounts by a person Resident in India) (Amendment) Regulations, 2004

In exercise of the powers conferred by clause (b) of Section 9 and clause (e) of sub-section (2) of Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999) and in partial modification of Notification No.FEMA 10/2000-RB dated May 3, 2000 as amended from time to time, Reserve Bank of India makes the following Regulations to amend the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) (Amendment) Regulations, 2004 namely:-

1. Short title and commencement :-

(i) These Regulations may be called the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) (Amendment) Regulations,2004.

(ii) They shall come into force from the date of their publication in the Official Gazette.

2. Amendment to the Regulations :-
In the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000 in sub-para (iv) of para 3 of the Schedule, the words 'not exceeding US $ 3 million' shall be deleted.

(Shyamala Gopinath)
Executive Director

Published in the Official Gazette of Government
of India - Extraordinary - Part-II, Section 3,
Sub-Section (i) dated 23.03.2004 - G.S.R.No.209(E)