ISSUE XI : Policy updates in certain FISCAL matters


In a constant endeavor to help in the process of liberating the Indian economy and preparing the economy to face the brunt of economic downturn, the Reserve Bank of India (“RBI”) has been issuing a series of circulars and notifications from time to time. These circulars and notifications issued by the RBI between July 2008 and middle of January 2009 form the subject matter of this bulletin, and are discussed below in detail.

1. Liberalization in External Commercial Borrowings (“ECB”) Policy [A.P. (DIR Series) Circular No. 46 dated January 02, 2009]

Based on a periodic review, some aspects of the ECB policy have been modified.1 The aforesaid circular has brought about the following changes. These changes will be reviewed againin June 2009.

1.1 The requirements of all-in-cost ceilings on ECB are dispensed with.2 Accordingly, all eligible borrowers, proposing to avail the ECB beyond the earlier existing permissible all-in-cost ceiling may approach the RBI under the approval route.

1.2 Corporates allowed to engage in the development of integrated township can avail of ECB under the approval route.

1.3 All Non-Banking Financial Companies (“NBFCs ”) which are exclusively involved in financing of the infrastructure sector are allow ed to avail  of ECBs from  multilateral/regional  financial  institutions and Government owned development financial institutions for on-lending to the borrowers in the infrastructure sector under the approval route.3

1.4 Entities in the hotel, hospital and software sectors are permitted to avail of ECB up to US$ 100 million per financial year, under the automatic route, for foreign currency and/or Rupee capital expenditure for permissible end-use.4

The modifications to the ECB guidelines are effective immediately. All other aspects of ECB policy, such as US$ 500 million limit per company per financial year under the automatic route, eligible borrower, recognized lender, end-use, all-in-cost ceiling, average maturity period, pre-payment, refinancing of existing ECB and reporting arrangements have till date remained unchanged.

2. Liquidity Adjustment Facility (“LAF”) – Repo and Reverse Repo Rates Reduced [Circular No. FM D.M OAG No. 32/01.01.01/2008-09 dated January 02, 2009]

The LAF was introduced by RBI in June 2000 in phases, to ensure smooth transition and keeping pace with technological upgradation. How ever, lately India’s growth trajectory has been impacted due to the current global and domestic macroeconomic situation. Thus, the RBI has constantly been adjusting its policy stance from demand management to arresting the moderation in growth. The aim of these measures was to augment domestic and forex liquidity and to ensure that credit continues to flow to productive sectors of the economy. Notably, since mid-September 2008, the RBI has been reducing the repo rate under the LAF.

Due to the current global and domestic macroeconomic situation, the RBI has reduced the fixed repo rate under the LAF by 100 basis points from 6.5% to 5.5% and reverse repo rate by 100 basis points from 5% to 4%. The Cash Reserve Ratio (“CRR”) of scheduled banks has also been reduced by 50 basis points from 5.5% to 5% from the fortnight beginning January 17, 2009. As per the RBI, reduction in the CRR will inject additional liquidity of around INR 200 billion (US$ 4.1 billion approximately) to the financial system.

The RBI further expects that the reduction in the policy interest rates and the CRR will enable banks to provide credit for productive purposes at appropriate interest rates.

3. Banks   to   monitor   unhedged   foreign   exchange   exposure   of   clients  [Circular No. DBOD.BP.BC. 96/21.04.103/2008-09 dated December 10, 2008]

The RBI earlier had advised banks to have a policy which explicitly recognized and took into account risks arising on account of unhedged foreign exchange exposure of their clients. Banks were also advised that foreign currency loans above US$ 10 million, or such limits as may be deemed appropriate vis- a-vis the banks portfolio of such exposures, can be extended by banks only on the basis of a well laid out policy of their boards with regard to hedging of foreign currency loans.5

Based on the above instructions the RBI has issued the present circular with the following advice for


3.1 The board policy of banks should cover unhedged foreign exchange exposure of all their clients including Small and Medium Enterprises (“SMEs”).

3.2 For arriving at the aggregate unhedged foreign exchange exposure of clients, their exposure from all sources including foreign currency borrowings and ECB should be taken into account.

3.3 Banks which have large exposures to clients should monitor and review on a monthly basis, through a suitable reporting system, the unhedged portion of the foreign currency exposures (“FCE”) of those clients, whose total FCE is relatively large. The review of unhedged exposure for SMEs should also be done on a monthly basis. In all other cases, banks are required to put in place a system to monitor and review such position on a quarterly basis.

3.4 In the case of consortium/multiple banking arrangements, the lead role in monitoring the unhedged FCE of clients, will have to be assumed by the consortium leader/bank having the largest exposure.6

4. Buyback/Prepayment  of   Foreign   Currency   Convertible  Bonds  (“FCCBs”)  [A.P.  (DIR Series) Circular No. 39 dated December 08, 2008]

The existing policy on the premature buyback of FCCBs7 has been reviewed and it has been decided to liberalize the procedure and consider applications for buyback of FCCBs by Indian companie s, both under the automatic and approval routes, as mentioned below:

4.1 Automatic Route

Banks may allow Indian companies to prematurely buyback FCCBs, subject to compliance with the following terms and conditions:

  • The buyback value of the FCCB shall be at a minimum discount of 15% on the book value;
  • The funds used for the buyback shall be out of the existing foreign currency funds held either in India (including funds held in Exchange Earner’s Foreign Currency (“EEFC”) account) or abroad and/or out of fresh ECB raised in conformity with the current ECB norms; and
  • Where the fresh ECB is co-terminus with the outstanding maturity of the original FCCB and is for less than 3 years, the all-in-cost ceiling should not exceed 6 months London Interbank Offered Rate plus ₤ 200 (US$ 275 approximately), as applicable to short term borrowings.8

4.2 Approval Route

The RBI will consider proposals from Indian companies for buyback of FCCBs under the approval route, subject to compliance with the following conditions:

  • The buyback value of the FCCB shall be at a minimum discount of 25% on the book value;
  • The funds used for the buyback shall be out of internal accruals, to be evidenced by statutory auditor; and
  • The total amount of buyback shall not exceed US$ 50 million of the redemption value, per company.

4.3 General Conditions

In addition to the conditions mentioned above, the follow ing conditions shall be applicable for the proposals both under the automatic and approval routes:

  • The FCCB should have been issued in compliance with the extant guidelines;
  • The FCCB should have been registered with the RBI;
  • No proceedings for contravention of foreign exchange regulations are pending against the company;
  • The right for buyback is vested with the issuer of FCCBs. However, the actual buyback is subject to the consent of the bond holders;
  • The FCCBs bought back/repurchased from the holders must be cancelled and should not be re-issued or re-sold;
  • The buyback will not have any effect on the bond holders not opting for the buyback or on the non- participating bond holders of companies opting for the buyback;
  • The Indian company shall open an escrow account with the branch or subsidiary of an Indian bank overseas or an international bank for buying back the FCCBs to ensure that the funds are used only for the buyback.

5. Liberalization of ECB Policy [A.P. (DIR Series) Circular No. 20 dated October 20, 2008]

With a view to promote the development of the mining, exploration and refinery sectors in the country, the RBI expanded the definition of infrastructure sector for the purpose of availing of ECB. Accordingly, the infrastructure sector will henceforth be defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, exploration and refining.

All other aspects of the ECB policy such as US$ 500 million limit per borrower, per financial year under the automatic route, eligible borrow er, recognized lender, end-use of foreign currency expenditure for import of capital goods and overseas investments, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged.

6. Issue of Foreign Currency Exchangeable Bonds (“FCEB”) Scheme, 2008 [A.P. DIR Series) Circular No. 17 dated September 23, 2008]

The Issue of FCEB Scheme, 2008 was notified by the Government of India (“GOI”), Ministry of Finance, Department of Economic Affairs vide Notification G.S.R. 89(E) dated February 15, 2008. Accordingly, the Issue of FCEB Scheme, 2008 has been operationalized in order to facilitate the is ue of FCEB by Indian companies.

Salient features of the FCEB Scheme, 2008 are as follows:

  • The issuing company will be part of the promoter group of the offered company and shall hold the equity shares being offered at the time of issuance of FCEB.
  • The offered company will be a listed company which is enga ged in a sector eligible to receive Foreign Direct Investment (“FDI”) and eligible to issue or avail of FCCB or ECB.
  • The investment under the scheme shall comply with the FDI policy as well as the ECB policy requirements.
  • The proceeds of FCEB can be invested by the issuing company in the promoter group companies and shall be used in accordance with end uses prescribed under the ECB policy. The promoter group company receiving such investments will not be permitted to utilize the proceeds for investments in the capital market or in real estate in India.
  • The proceeds of FCEB can also be invested by the issuing company oversea s by way of direct investment in joint ventures or wholly owned subsidiaries subject to the existing guidelines on Indian direct investment in joint ventures or wholly ow ned subsidiaries abroad.
  • The rate of interest payable on FCEB and the issue expenses incurred in foreign currency shall be

within the all-in-cost ceiling as specified by RBI under the ECB policy.

  • At the time of issuance of FCEB the exchange price of the offered listed equity shares shall be as per FCEB Scheme.
  • The minimum maturity of the FCEB for redemption purposes shall be 5 years. The exchange option can be exercised at any time before redemption.
  • The proceeds of the FCEB shall be retained and/or deployed overseas in accordance with the policy for the proceeds of ECB.
  • The tax treatment on exchangeable bonds would be as per FCEB Scheme.

7. Rationalization of Overseas Investment [A.P. DIR Series) Circular No. 14 dated September 05, 2008]

With a view to simplify the procedure, RBI has decided that share certificates or any other document as an evidence of investment in a foreign entity should not be submi ted to the RBI. The share certificates (or any other document) as evidence of investment shall be submitted to and retained by the bank, who would be required to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents so received. A certificate to this effect should be submitted by the bank before the RBI.

8. Overseas Direct Investment by Registered Trust/Society [A.P. (DIR Series) Circular No. 07 dated August 13, 2008]

An Indian company is eligible to invest in a joint venture or wholly-ow ned subsidiary abroad.9 To liberalize the policy on overseas investments the RBI in consultation with the GOI had 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.10

To further liberalize the policy on overseas investment the RBI has in consultation with the GOI, permitted registered trusts and societies which have set up hospital(s) in India to make investment in the same sector(s) in a joint venture or wholly owned subsidiary outside India, with the prior approval of RBI.11 Registered trusts and societies have to satisfy the eligibility criteria set out in the notification dated June 27, 2008 in order to make the investment.

9.Foreign Currency Accounts in India – Project Offices [A.P. (DIR Series) Circular No. 02 dated July 31, 2008]

Earlier, foreign companies having project offices in India were permi ted to open only one foreign currency account for each project, subject to certain terms and conditions.12 With a view to avoid currency

exposure of foreign companies, the RBI has liberalized the procedure and has allowed banks to open an additional foreign currency account for each project  office (established under the general/specific ap  roval of RBI) subject to the same terms and conditions as applicable to the existing foreign currency account provided that both the foreign currency accounts are maintained with the same bank.

10. Liberalization of Security for ECB’s [A.P. (DIR Series) Circular No. 01 dated July 11, 2008]

Under the extant ECB guidelines, the choice of security to be provided to the overseas lender/supplier  for  securing  ECB  is  left  to the  borrower.  However, creation of  charge  over immoveable as ets and financial securities, such as shares, in favour of the overseas lender is subject to fulfillment of certain conditions.13

As a measure of rationalization of the existing procedures, it has been decided to allow banks to convey “no objection” under Foreign Exchange Management Act, 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender/security trustee,  to secure the ECB to be raised by the borrower. Before according “no objection”, banks may ensure and satisfy themselves that:

  • The underlying ECB is strictly in compliance w ith the extant ECB guidelines;
  • There exists a security clause in the Loan Agreement requiring the borrower to create charge on immovable assets/financial securities/furnish corporate or personal guarantee;
  • The Loan Agreement has been signed by both the lender and the borrower; and
  • The borrower has obtained Loan Registration Number from the RBI.

Upon compliance of the foregoing conditions, the banks may convey their “no objection” for creation of charge on immovable assets, financial securities and issue of per sonal or corporate guarantee, subject to certain conditions indicated in paragraphs 6 (a), 6 (b) and 6 (c) of this circular.

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