A. Rollover of Guarantee given to JV/WOS incorporated outside India
Reserve Bank of India, vide A. P (DIR Series) Circular No. 83 dated 3rd January, 2014 has amended the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] (the Notification), as amended from time to time and has decided to not consider the renewal/rollover of an existing/original guarantee as a fresh financial commitment. Therefore, roll-over of the guarantee shall not be required to be reported as a fresh guarantee.
For rollover of the existing guarantee shall be 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.
B. 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.
C. 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:
- Road including bridges
- sea port and airport
- Industrial parks
- Urban infrastructure (water supply, sanitation and sewage projects)
- Mining, exploration and refining,
- 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.
D. Clarification on the transactions covered under section 6(4) of the Foreign Exchange Management Act, 1999
Section 6(4) of the FEMA, 1999 provides that a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India only if such currency, security or property was acquired, held, or owned by such person when he was resident outside India or inherited from a person resident outside India.
The Reserve Bank of India vide A. P (DIR Series) Circular No. 90 dated 9th January, 2014 has clarified the transactions that are covered under the above mentioned section of the FEMA, 1999. Following are the transactions:
- Foreign currency accounts opened and maintained by such a person when he was resident outside India;
- Income earned through employment or business or vocation outside India taken up or commenced while such person was resident outside India;
- Income earned from investments made while such person was resident outside India;
- Gift or inheritance received while such a person was resident outside India;
- Foreign exchange, held outside India by a person resident in India which is acquired by PRI from PROI including any income arising there from, and conversion or replacement or accrual to the same;
- Utilization of all their eligible assets abroad as well as income on such assets or sale proceeds thereof received by the person resident in India after their return to India for making any payments or to make any fresh investments abroad without approval of Reserve Bank, provided the cost of such investments and/ or any subsequent payments received thereof are met exclusively out of funds forming part of eligible assets held by them and the transaction is not in contravention to extant FEMA provisions.
E. Clarification on Establishment of Liaison Office/Branch Office/ Project Office in India by Foreign Entities
The Reserve Bank of India considers the applications of foreign companies to establish their branch/liaison/project offices in India. However, there are specific countries the entities of which are required to obtain specific approval from RBI before setting up place of business in India. Those countries are Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran and China.
The Reserve Bank of India vide A. P (DIR Series) Circular No. 93 dated 15th January, 2014 has clarified that the regulation for establishment of liaison/branch/project office will be applicable to the entities from Hong Kong and Macau also and therefore, citizens of Hong Kong and Macau are also required to obtain approval from Reserve Bank of India for establishing their place of business in India.
The above amendment to the regulation may be due to the reason that these two countries are being administered by China which is already in the sensitive list of RBI and therefore establishment of place of business by entities in Hong Kong and Macau could become back-end entry door for China to enter into Indian Market.
F. Conversion of External Commercial Borrowings and Lump sum Fee/Royalty into Equity
As per the extant regulations of External Commercial Borrowing (ECB), the company that has raised funds through ECB is allowed to convert the same into the equity subject to the fulfillment of following conditions:
- 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.
- The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
- 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.