ISSUE X: Liberalization in overseas investment & ECB

INTRODUCTION

The Reserve Bank of India (“RBI”) issues notifications and circulars regularly so that the shackles of control are liberalized. These notifications and circulars facilitate cross-border investment and other fiscal activity, both inbound and outbound. Our tenth Regulatory Affairs bulletin highlights the various policies through which overseas investment has been liberalized and External Commercial Borrowing (“ECB”) has been made flexible during the second quarter of 2008.

1.   Overseas  direct  investment  by  registered  trust/society   [A.P.  (DIR  Series) Circular No. 53 dated June 27, 2008]

Pursuant to notification number – FEMA 120/RB-2004, an Indian company is eligible to invest in a joint venture or wholly-owned subsidiary abroad.

To further liberalize the policy on overseas investments the authorized dealer banks in consultation with the Government of India has decided to allow registered trusts and societies engaged in manufacturing/educational sectors to make investments in the same sector(s) in a joint venture or wholly- owned subsidiary outside India with the prior approval of RBI.

1.1 Criteria  for  Overseas  Investment  by  registered  trust/society  [Annex  to  A.P. (DIR Series) Circular No. 53 dated June 27, 2008]

Trust

  • The trust should be registered under the Indian Trust Act, 1882.
  • The trust deed must permit the proposed investment overseas.
  • The proposed investment should be approved by the trustee/s.
  • The authorized dealer bank has to be satisfied that the trust is KYC (know your customer) compliant and is engaged in a bona fide activity.
  • The trust must have been in existence at least for a period of three years before making any overseas investment.
  • The trust must not have come under the adverse notice of any regulatory or enforcement agency.

Society

  • The society should be registered under the Societies Registration Act, 1860.
  • The memorandum of association and rules and regulations should permit the society to make the investment, which should be approved by the governing body.
  • The authorized dealer bank has to be satisfied that the society is KYC (know your customer) compliant and is engaged in bonafide activity.
  • The society must have been in existence at least for a period of three years.
  • The society must not have come under any adverse notice of any regulatory or enforcement agency.

2. Overseas investments – Liberalization and Rationalization [A.P. (DIR Series) Circular No. 48 dated June 03, 2008]

The above notification has further liberalized overseas investments in the following sectors.

2.1  Energy and Natural resources

At present, an Indian entity is allowed to make direct investment in joint ventures and wholly-owned subsidiaries abroad up to 400% of the net worth as on the date of the last audited balance sheet under the automatic route. With a view to provide greater flexibility to Indian parties to invest abroad, the Government of India has decided to allow Indian companies to invest in excess of 400% of the net worth as on the date of the last audited balance sheet in the energy and natural resources sectors such as oil, gas, coal and mineral ores. Investments in excess of 400%, however, will need prior approval of the RBI.

2.2 Overseas unincorporated entities in oil sector

Navaratna Public sector undertakings are allowed to invest in overseas unincorporated entities in the oil sector, which are duly approved by the Government of India, without any limits under the automatic route. This facility has now been extended to ONGC Videsh Ltd. and Oil India Ltd. With a view to liberalize further, other Indian entities are permitted to invest in overseas unincorporated entities in the oil sector. Banks may allow a remittance up to 400% of the net worth of the Indian company after ensuring that the proposal has been approved by the competent authority and is duly supported by a certified copy of the Board resolution approving such investment.

2.3  Capitalization of Exports

In terms of regulation 11(1) of notification number – FEMA 120/RB 2004, an Indian party making direct overseas investment in accordance with Foreign Exchange Management Regulations 2004 in full or part of the amount due on account of export of plant and machinery, has to obtain the prior approval of the RBI where such export proceeds have remained unrealized beyond a period of six months from the date of export. In order to align this provision with the foreign trade policy Indian parties may approach the RBI for capitalization of sale proceeds only in cases where the exports remain outstanding beyond the prescribed period of realization.

3.External Commercial Borrowings by services sector [A.P. (DIR Series) Circular No. 46 dated June 02, 2008]

Under the extant ECB guidelines, borrowers in the services sector are not eligible to avail ECB under the automatic route. The Government of India has now decided to allow entities in the service sector to avail ECB up to USD 100 million, per financial year, for the purpose of import of capital goods under the approval route. Further the existing guidelines on trade credit, allowing companies (including services sector), to avail trade credit up to USD 20 million per import transaction, for a period of less than three years, for import of capital goods shall continue.

4. External Commercial Borrowing Policy- liberalization [A.P. (DIR Series) Circular no. 43 dated May 29, 2008]

Based on a periodic review, some aspects of the ECB policy have been modified. At present, borrowers proposing to avail ECB up to USD 20 million for rupee expenditure for permissible end-uses require prior approval of the Reserve Bank under the approval route. The aforesaid circular has brought about the following changes:

4.1 Borrowers in the infrastructure sector may avail ECB up to USD 100 million for rupee expenditure for permissible end-uses under the approval route.

4.2 In case of other borrowers, the existing limit of USD 20 million for rupee expenditure for permissible end-uses under the approval route has been enhanced to USD 50 million.

This amendment to ECB guidelines has come into force. All other aspects of the ECB policy such as USD 500 million limit per company per year under the automatic route, eligible borrower, recognised lender, average maturity period, prepayment, refinancing of the existing ECB and reporting arrangements remain unchanged.

5. Foreign investment in commodity exchanges- amendment to the FDI scheme [A.P. (DIR Series) Circular No. 41 dated April 28, 2008]

The Government of India has decided to allow foreign investment in commodity exchanges subject to the following conditions:

  • There will be a composite ceiling of 49% foreign investment, with the FDI limit of 26% and FII limit of 23%.
  • FDI will be allowed with specific approval of the government.
    • The FII purchases in equity of commodity exchanges will only be restricted to secondary markets.
    • Foreign investment in commodity exchanges will also be subject to compliance with the regulations issued by the Forward Market Commission.

6.  Overseas investment by mutual funds- liberalization [A.P. (DIR Series) Circular No. 34 dated April 03, 2008]

With a view to provide great investment opportunities overseas, the aggregate ceiling for overseas investment by mutual funds registered with the Securities and Exchange Board of India (“SEBI”) has been increased from USD 5 billion to USD 7 billion. The existing facility to allow a limited number of qualified

Indian mutual funds to invest cumulatively up to USD 1 billion in overseas exchange traded funds, as may be permitted by SEBI, shall continue and will be subject to the rules and guidelines of SEBI.

(Ashwat Kumar, a IInd year law student of Amity Law School, who is currently pursuing his internship at PSA, has prepared this bulletin under the guidance of Ms. Priti Suri).

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