ISSUE VIII: Changing FISCAL regulations


In a constant endeavor to help in the process of liberating the Indian economy, the Reserve Bank of India (“RBI”) has been issuing a series of circulars and notifications from time to time. The foreign investments and currency transaction regulations are also amended intermittently to be in sync with time. These guidelines issued by the RBI in the months of October, November and December 2007 form subject matter of this bulletin, and are discussed below in detail.

1. RBI guidelines

1.1 Foreign Direct Investments (“FDI”): Issue of shares under FDI and refund of advance remittances

(A. P. (DIR Series) Circular No.20 dated December 14, 2007)

Any person resident outside India is permitted to purchase equity instruments in the form of equity shares/compulsorily  convertible  preference  shares  and  compulsorily  convertible  debentures  issued  by  an Indian company under the FDI policy. The Indian company is allowed to receive the amount of consideration in advance towards issue of such equity instruments,1 and report the receipt of such amount of consideration within 180 days.2

This period is calculated from the receipt of the inward remittance or the date of debit of the Non- Resident External/Foreign Currency Non-resident (“NRE/FCNR  (B)”) account of the foreign investor with an Authorized Dealer Category–I (“AD Category I”) bank.

In case the number of days exceeds the aforesaid period, the amount of consideration so received shall be refunded immediately to the non-resident investor by outward remittance. The AD Category I banks may allow such outward remittances after satisfying themselves with the bonafides of the transactions. Also, advances against equity instruments may be received only where the FDI is allowed under the automatic route. Finally, non-compliance with the above provision would attract penal provisions.

1.2 Permission for Short-selling of Equity Shares by SEBI registered FIIs (A. P. (DIR Series) Circular No. 23 dated December 31, 2007)

RBI, in consultation with the government of India and Securities Exchange Board of India (“SEBI”), has decided to permit the SEBI-registered Foreign Institutional Investments (“FII”) and sub- accounts of FII to short sell, lend and borrow equity shares of Indian companies. Earlier the registered/sub- accounts of FIIs were permitted only to buy/sell equity shares/debentures of Indian companies but were not allowed to engage in short selling and were required to take delivery of securities purchased and give delivery of securities sold.3

The  FII  participation  in  short  selling  as  well  as  borrowing/lending  of  equity  shares  shall  remain subject to the current FDI policy and the purpose of delivery shall only be for short sale. And the margin/collateral shall be maintained by FIIs only in the form of cash without paying any interest to the FII on such margin/collateral.

1.3 Risk Management and Inter-Bank Dealings-Commodity Hedging (A.P. (DIR Series) Circular No.17 dated November 6, 2007)

Currently, residents in India are permitted to hedge their commodity price risk after obtaining specific approvals from the RBI or from select authorized dealers certified by RBI for the purpose.

But considering the volatility of global oil prices and to modulate the impact of adverse price fluctuations on their margins, domestic oil marketing and refining companies have also been permitted to hedge their commodity price risk to the extent of 50% of their inventory based on the volumes in the quarter preceeding the previous quarter. This hedging may be undertaken through designated AD Category I banks4 using Over The Counter (“OTC”)/exchange traded derivatives overseas with the tenor restricted to a maximum of one-year forward.

This facility must be approved by AD Category I banks only after:5

  • Ensuring that the Board’s approval has been obtained for the hedging of inventories and also for dealing in OTC markets.
  • Carrying out due diligence regarding “user appropriateness” and suitability” of the hedging activity of the customer.

1.4 Foreign Exchange Management (Deposit) (Fourth Amendment) Regulations, 2007 (Notification No.FEMA.168/2007-RB dated October 23, 2007)

According to the existing norms, the authorized dealers should convert the FCNR (B) deposits on maturity into resident rupee deposit accounts or resident foreign currency account at the option of the account holder. Now, authorized dealers are also allowed to permit remittance of the maturity proceeds of FCNR (B) deposits to parties outside India, provided the transaction is specifically authorized by the account holder and the authorized dealer is satisfied about the bonafides of the transaction. This arrangement shall be deemed to have come into effect on May 18, 2007. However, it must be ensured that no person is adversely affected as a result of retrospective effect being given to this regulation.

4 Authorized by RBI in terms of A.P. (DIR Series) Circular No. 03 dated July 23, 2005.
5 Also conditions and guidelines contained in A.P. (DIR Series) Circular No.03 dated July 23, 2005 should be complied with.
4 Authorized by RBI in terms of A.P. (DIR Series) Circular No. 03 dated July 23, 2005.
5 Also conditions and guidelines contained in A.P. (DIR Series) Circular No.03 dated July 23, 2005 should be complied with.




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