ISSUE V : Mid-year update on key policy changes


As we move into the second half of 2007, the Indian economy continues to further accelerate the economic growth and success experienced so far. The Reserve Bank of India (“RBI”) is the chief regulator of banking and monetary system in India, and has the responsibility for ensuring this growth by introducing sound economic policies throughout the year. It also regulates foreign exchange under the Foreign Exchange and Management Act, 1999 (“FEMA”). It regularly issues notifications and circulars to maintain the pace and spirit of liberalization and in order to facilitate growth in the economy.

This bulletin covers selected circulars and notifications issued by RBI and also the Department of Industrial Policy and Promotion after January 1, 2007.

1.0 RBI Circulars

1.1 External Commercial Borrowings (“ECB”) [AP (DIR Series) Circular No. 44 dated April 30, 2007]

The previous limit of US$ 300 million for prepayment of ECB has been enhanced to US$ 400 million in order to allow corporates to manage their liquidity and interests costs dynamically and with more flexibility. Thus, Authorised Dealer (“AD”) Category-I banks1 may allow prepayment in accordance with this policy without prior approval of RBI, subject to compliance with the minimum average maturity period as applicable to the loan.

1.2 Liberalisation of Remittance for consultancy services [AP (DIR Series) Circular No. 46 dated April 30, 2007]

Previously, under Rule 5 of the Foreign Exchange Management Rules, 2000, in case of remittance for any consultancy service procured from outside India, foreign exchange drawn above US$ 1 million per project required prior RBI approval. This policy has been altered by raising the limit for remittance (without prior RBI approval) for consultancy service procured from outside India for Indian companies, who execute infrastructure projects.2 The limit for remittance in these cases has been raised to US$ 10 million per project. Thus, AD Category-I banks may allow remittances in accordance with the above outlined policy after verifying the bonafides of the transaction. The existing remittance limit of US$ 1 million per project, for any other consultancy service availed from outside India, remains in effect in all other cases.

1.3 Liberalisation of reimbursement of pre-incorporation expenses [AP (DIR Series) Circular No. 47 dated April 30, 2007]

Previously, under Rule 5 of the Foreign Exchange Management Rules, 2000, prior approval of RBI was required for drawing foreign exchange for remittance exceeding US$ 100,000 by an Indian entity by way of reimbursement towards pre-incorporation expenses. It is now decided to allow remittance of foreign exchange towards reimbursement of pre-incorporation expenses up to 5% of the investment brought in India or US$ 100,000, whichever is higher, on the basis of certification of statutory auditors.

The change in policy of RBI has increased the amount of remittance which can be made without prior RBI approval to 5% of the amount of investment which may exceed the prior maximum amount of US$ 100,000. Thus, a company will not have to seek permission for remittance for up to US$ 100,000 in any case. Once 5% of investment in India surpasses US$ 100,000, that 5% becomes the new maximum amount of remittance possible without prior permission of RBI and increases proportionally as the amount of investment brought into India increases.

1.4 Opening of Escrow/Special Accounts by Non-Resident Corporates [AP (DIR Series) Circular No. 62 dated May 24, 2007]

Previously, prior approval of RBI was required to open an escrow account or a special account for the purpose of transfer of shares or convertible debentures of an Indian company, either under an open offer or delisting or exit offer in accordance with the provisions laid by the Securities and Exchange Board of India (“SEBI”) under latter’s various regulations or guidelines. However, as per the latest announcement, RBI has decided to alter this policy to allow AD Category-I banks to open such accounts on behalf of non- resident corporates3 for acquisition, transfer of shares, convertible debentures through open offers, delisting, and exit offers (in accordance with the provisions laid by SEBI and its various regulations or guidelines), without prior approval of RBI.

Opening of such accounts are also subject to conditions that:

  • Acquisition/transfer  of  shares  is  strictly  in  accordance  with  the  provisions  of  Notification  No. FEMA 20/2000-RB or any other applicable SEBI regulations.
  • Such accounts must be non-interest bearing.
  • Escrow accounts are opened in Indian Rupees jointly and severally by the non-resident corporates.
  • For escrow accounts, permitted credits shall be foreign inward remittance through normal banking channels while permitted debits will be those indicated by relevant regulations prescribed by SEBI.
  • Special accounts are opened in Indian Rupees jointly and severally by the non-resident corporates and with credits and debits pursuant to applicable SEBI regulations.
  • The resident mandatee empowered for this purpose may operate the escrow account in accordance with SEBI regulations and the specific approval of the AD Category-I bank with whom the account is opened.
  • Fund-based or non-fund based facilities shall not be permitted against the balance in the accounts.
  • The requirement of compliance with Know-Your-Customer guidelines issued by RBI shall rest with the AD Category-I Bank.
  • After all the formalities in respect of the said acquisition are completed, the balance in escrow account may be repatriated using the current prevailing exchange rate.
  • If  the  proposal  under  the  acquisition/transfer  does not  materialize,  the  AD  Category-I  bank  may allow repatriation of the entire account lying to the credit of the escrow account on being satisfied with the bonafides of such remittances.
  • After completing the requirements as outlined above, the accounts shall be immediately closed.

2.0 Department of Industrial Policy & Promotion

2.1 Enhancement of the Foreign Direct Investment Ceiling in the Telecom Sector to 74% from the previous limit of 49% [Department of Industrial Policy and Promotion Press Note No. 3 (2007 Series) dated April 19, 2007]

The Indian Government has enhanced the ceiling of Foreign Direct Investment (“FDI”) from 49% to 74% in the telecom sector. The FDI ceiling enhancement will apply in the instance of Basic, Cellular, Unified Access Services, National and International Long Distance, V-Sat, Public Mobile Radio Trunked Services, Global Mobile Personal Communications Services, as well as other value added services.

2.2 Foreign Direct Investment

The FDI ceiling includes both direct foreign investment (including investment by Foreign Institutional Investors, Non-Resident Indians, Foreign Currency Convertible Bonds, American Depository Receipts, Global Depository Receipts, and convertible preference shares held by a foreign entity) and indirect foreign investment (investment in the company/companies holding shares of the licensee company and their holding company/companies or legal entity on a proportionate basis). Shares of the company held by Indian public sector banks and Indian financial institutions qualify as Indian holdings. The Indian shareholding must not be below 26%.

2.3 Security Conditions

The FDI policy for the telecom sector also imposes certain conditions on the licensee company for security purposes. Few of the important conditions have been enlisted. Indian citizens must hold certain positions4 within the company. The majority of the Directors on the Board must be Indian. In the event that foreign nationals occupy the positions of Chairman, Managing Director, Chief Executive Officer, and/or Chief Financial Officer, they will be required to undergo a security process of the Ministry of Home Affairs

(“MHA”) annually and in case something adverse is discovered during the process, the licensee company will be bound by the direction of the MHA. The licensee company shall not transfer any user or accounting information relating to a subscriber that does not relate to international roaming/billing, to any person or place outside of India. The company must provide traceable identity of their subscribers (up to limit of the roaming agreement in the case of foreign subscribers). Further, the licensee company should be able to provide geographical location of any subscriber at a given point in time.

2.4 Conditions for Remote Access

Other restrictions relate to the use of Remote Access (“RA”) by the licensee company for their network. RA can only be provided to approved locations abroad through approved locations in India.5 In addition, RA is restricted from accessing certain content.6 Further, the licensee company is not allowed to use RA facility to monitor content.

Other provisions are related to the ability of the licensor to regulate and monitor the use of RA to ensure its lawful and legitimate operation. Lastly, the Government of India (“the licensor”) is empowered to restrict the use of RA for security reasons. The licensor will be able to restrict the licensee from operating in sensitive areas7 in the light of national security. Further, monitoring shall only be permissible upon authorization by Union Home Secretary  or  Home  Secretaries  of  the  States/Union  Territories.  The  licensee  shall  provide  access  to  their network, other facilities, and books of account to the security agencies for traffic monitoring reasons. These provisions will also apply to all existing telecom companies regardless of FDI level (including those operating at 49% FDI). Other service providers engaged in the business of call centers, business process outsourcing, tele-education etc., and utilize the telecom infrastructure provided by the licensed companies are permitted to have 100% FDI.

1 Foreign Exchange Management (Deposit) Regulations, 2000, defines AD as a person authorised under sub-section 1 of Section 10 of FEMA. According to the sub-section, the RBI (after an application made to it) can authorise any person to deal in foreign exchange or in foreign securities as an authorised dealer, money changer, offshore banking unit or any other manner which it deems fit. For instance, Bank of Baroda and ABN Amro Bank N V are both designated as such banks.
2 Infrastructure sector includes; power, telecommunication, railways, road including bridges, sea port and airport, industrial parks, urban and infrastructure such as water supply, sanitation and sewage projects.
3 Non-resident corporates involved in the activity of open offer, or delisting, or exit offer.
5 The Department of Telecom, Government of India, in consultation with the national security agencies shall approve the locations.
6  RA to the suppliers/manufacturers and affiliates is not allowed to access lawful interception system, lawful interception monitoring, call contents of traffic, or any sensitive sector/data designated by the licensor.
7 This may include areas which, from time to time, may be considered as sensitive in the interests of maintaining the nation’s security. For instance, the Jammu and Kashmir border may constitute one such area.
8 Existing telecom providers must submit an unconditional compliance to the licensor within three months from April 19, 2007 (the date of the announcement published in Press Note 3) and also on July 1 and January 1 on a six month basis thereafter.

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