In keeping with its profile of regulating and liberating the Indian economy, the Reserve Bank of India (“RBI”) issues series of circulars and notifications from time to time. The guidelines recently issued range from liberalizing External Commercial Borrowing (“ECB”) norms, allowing banks to give rupee loans to Non-Resident Indian (“NRI”) employees of Indian companies to take up employee stock options, and increasing investment limits by Indian companies in foreign ventures. These guidelines issued by the RBI form subject matter of this bulletin and are discussed below in detail.
1. RBI guidelines
1.1 Review of ECB Policy [A. P. (DIR Series) Circular No. 04 dated August 7, 2007]
To fulfill the growing capital needs of the country, RBI has reviewed the guidelines relating to raising of ECBs by Indian companies. Some of the key changes brought about in the policy are indicated below.
- ECB of more than US $ 20 million per borrower company per financial year would be permitted only for foreign currency expenditure for permissible end-uses1 of ECB. Accordingly, borrowers raising ECB of more than US $ 20 million have to park the ECB proceeds overseas for use as foreign currency expenditures and remittance of funds will not be made to India. The above modifications would apply to ECB in excess of US $ 20 million per financial year both under the automatic (that is, without the prior approval of RBI) and approval route.
- ECB up to US $ 20 million raise for incurring foreign currency expenditures is permissible under the automatic route provided the funds are parked overseas and not remitted to India. However, borrowers proposing to avail ECB up to US $ 20 million for rupee expenditure would require prior approval of the RBI and such funds shall be continued to be parked overseas until actual requirement in India.
1.2 Prepayment of ECB [A. P. (DIR Series) Circular No. 10 dated September 26, 2007]
To provide greater flexibility to the corporates in managing their liquidity and interest costs the existing limit for prepayment of ECB has been enhanced from US $ 400 million to US $ 500 million. Accordingly, Authorized Dealer (“AD”)/banks may allow prepayment of ECB up to US $ 500 million without prior approval of the RBI subject to compliance with the minimum average maturity period as applicable to the loan.
1.3 Rupee Loans to NRI Employees of Indian Companies under Employees Stock Option (“ESOP”) Scheme [A. P. (DIR Series) Circular No. 07 dated August 22, 2007]
Indian banks are allowed to extend rupee loans to resident employees of an Indian company to purchase shares of the company under the ESOP scheme. The prescribed limit of the loan is 90% of the purchase price of the shares or INR 2 million, whichever is lower. Rupee loans extended by banks under ESOP scheme are treated as bank’s exposure to capital market and the amounts of the loans granted by the banks has to be within the overall ceiling of 40% of the net worth of the lending bank. Recently, RBI has extended this facility to NRI employees of Indian companies and has allowed AD banks to grant rupee loans to such NRI employees for acquiring their shares under the ESOP scheme. Apart from the facilities mentioned above certain additional conditions are imposed on the loans granted to NRIs, detailed below. The loan extended to the NRIs has to be as per the scheme approved by the board of the AD bank.
- The rate of interest and margin on such loans may be decided by the banks, subject to the directives issued by the RBI.
- The amount shall be paid directly by the bank to the company and will not be credited to the borrowers’ non-resident accounts in India.
- The loan amount has to be repaid by the borrower by way of inward remittances or by debit to its foreign currency account.
1.4 Overseas Direct Investment (“ODI”) – Liberalization [A.P. (DIR Series) Circular No. 11 dated September 26, 2007]
In view of the robust growth of the Indian economy and foray of investment by the Indian companies in overseas markets, the norms for investment by Indian companies in ventures abroad have been further liberalized.
1.4.1 Enhancement of limit for ODI
In terms of extant provisions the total overseas investment of an Indian party in all its JVs and/or WOS abroad engaged in any bonafide business activity was capped at 300% of its net worth for companies incorporated in India and 200% of net worth in the case of registered partnership firms. This limit has been enhanced to 400% of the net worth of the Indian party as on the date of the last audited balance sheet. This will allow the Indian investors to invest significantly in JV and WOS abroad.
1.4.2 Portfolio Investment by listed Indian Companies
Until recently, listed Indian companies were permitted to invest up to 35% of their net worth as on the date of its last audited balance sheet, in the equity of listed foreign companies, which were listed on a recognized stock exchange and who had a shareholding of at least 10% in such Indian listed companies. Bonds and fixed income securities issued by overseas companies, under the portfolio investment scheme.
In order to provide greater opportunities to listed Indian companies for portfolio investments, the existing limit of 35% is enhanced to 50%. The requirement of a reciprocal 10% shareholding in Indian companies by the foreign entity has been dispensed. Accordingly, listed Indian companies are now permitted to invest up to 50 % of their net worth as on the date of its last audited balance sheet, in (i) shares and, (ii) rated bonds/fixed income securities, rated not below investment grade by accredited/registered credit rating agencies, issued by listed overseas companies.
1.5 Overseas Investment by Mutual Funds (“MFs”)- Liberalization [A.P. (DIR Series) Circular No. 12 dated September 26, 2007]
The provisions for overseas investments by MFs registered with Securities and Exchange Board of India (“SEBI”) has been further liberalized, with immediate effect, as under:
1.5.1 Enhancement of the Aggregate Ceiling
The aggregate ceiling for overseas investment by MFs, registered with SEBI, has been enhanced from US $ 4 billion to US $ 5 billion with immediate effect. The existing facility to allow a limited number of qualified Indian MFs to invest cumulatively up to US $ 1 billion in overseas Exchange Traded Funds (“ETF”s)2, as may be permitted by SEBI, shall continue.
1.5.2 Further Avenues for Overseas Investment
MFs, registered with SEBI were permitted to invest in American Depository Receipts (“ADRs”)/Global Depository Receipts (“GDRs”) of Indian and foreign companies, in the equity of overseas companies listed on a recognized stock exchange overseas, in overseas MFs that make nominal investments (that is, to the extent of 10 % of net asset value) in unlisted overseas securities, and overseas ETFs that invest in securities. In order to enable the MFs to tap a larger investable stock overseas, RBI has allowed MFs to invest in additional instruments listed below, subject to the guidelines issued by SEBI.
- initial and follow-up on public offerings for listing at recognized stock exchanges overseas;
- foreign debt securities in the countries with fully convertible currencies, short- term as well as long- term debt instruments;
- money market instruments;
- repos in the form of investment; however, this must not involve any borrowing of funds by MFs;
- government securities;
- derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying securities;
- short-term deposits with banks overseas;
- units/securities issued by overseas MFs or Unit Trusts registered with overseas regulators and investing in (a) aforesaid securities, (b) Real Estate Investment Trusts listed in recognized stock exchanges overseas, or (c) unlisted overseas securities (not exceeding 10 % of their net assets).
1 The ECB may be used for (i) investment in real sector and infrastructure such as import of capital goods, new projects, modernization of the existing production units; (2) for investment in joint-ventures (“JV”) or wholly-owned subsidiaries (“WOS”) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad; (3) acquisition of shares in the disinvestment process; (4) Offer to the public under the disinvestment scheme of a Public Sector Unit; (5) NGOs engaged in micro finance activities may utilize ECB proceeds for lending to self-help groups.
2 ETF is a security that tracks an index of a commodity, or a basket of assets like gold. So, it is an index fund but trades like a stock on an exchange and experiences price changes throughout the day as it is bought and sold.