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I. Introduction 

  • FERA 1973 replaced by FEMA 1999
  • FERA being strict, not suitable in the new and liberal economy
  • FEMA, 1999 came into effect from 01.06.2000
  • FEMA is soft, liberal and simplified, aims at boosting foreign trade investment and more in tune with the country’s new economic era.

The objectives of FEMA being-

  • To consolidate the law relating to foreign exchange
  • Facilitating external trade and payments
  • Promoting the orderly development and maintenance of foreign exchange market in India
  • Promotion of foreign exchange markets

Salient Features-

  • Forex transactions categorised – Current / Capital
  • Provisions as per the residential status
  • Residential status on the basis of stay (182 days) as well as purpose
  • Civil Law
  • No arrest
  • Prosecution to prove charges against accused
  • Investigation and adjudication segregated
  • Compounding of contravention, within 180 days

Authorised Dealer Bank categorisation

  • AD Category – I

– Commercial Banks

– State Co-op Banks

– Urban Co-op Banks

  • AD Category – II

– Up Graded FFMCs

– Co-op. Banks

– RRB-Regional Rural bank


  • Select Financial and other Institutions
  • FFMCs (Full Fledge Money Changers)
  • All current & capital account transactions.
  • Specified non-trade current account transactions.
  • Transactions incidental to their FE activities.
  • Purchase of FC & sale of FE for pvt/business visits.

Forex Transactions-

  • Types of transactions :-

Current Account Transactions and Capital Account Transactions

  • Rational :

Current Account: The transactions which are not prohibited are permitted.

[Sec. 5 freedom to draw Foreign Exchange]

Capital Account: The transactions which are not permitted are restricted.

[Sec. 6 RB, by regulation prohibit, restrict or regulate.]

 FEMA applicable to-

  • The whole of India
  • Any, Branch, office and agency, which is situated outside India, but is owned or controlled by a person resident in India.

FEMA covers two different types of categories:

  • Person Resident in India
  • Person Resident outside India

II. Foreign Direct Investment (FDI) 

  • Foreign Direct Investment means investment through capital instruments (equity shares, Compulsorily Convertible Debentures, Compulsorily Convertible Preference shares and share warrants) by a person resident outside India in an unlisted Indian company or in 10% or more of the post issue paid-up capital on a fully diluted basis of a listed Indian company.
  • Foreign Investment means any investment made by a person resident outside India on repatriation basis in capital instrument of an Indian company or to the capital of an LLP.
  • Foreign Portfolio Investment means any investment made by a person resident outside India through capital instrument where such investment is less than 10% of the post issue paid-up capital on a fully diluted basis of a listed Indian company.
  • Unless otherwise specified in the Regulations or the relevant schedules, any investment made by a person resident outside India shall be subject to the entry route, sectoral caps or the investment limits, as the case may be.
  • Entry routes (Regulation 16A) are of two types-
    • Automatic route
    • Government route (Approval Route)
  • Sectoral caps (Regulation 16B)

New procedure for Government approval-

  • The Foreign Investment Promotion Board (FIPB) has been abolished.
  • The ‘Foreign Investment Facilitation Portal’ (FIFP), an administrative body to facilitate FDI applicants under approval route has been introduced.

III. External Commercial Borrowing (ECB)

  • ECB is a key component of external debt.
  • It is a Capital Account Transaction

ECB latest-

  • ECB both in foreign currency and Indian Rupee, has been consolidated and the Revised Regulation FEMA 3 R/2018 has been notified by the Government of India on December 17, 2018.
  • Tracks I and II under the existing framework are merged.
  • All entities eligible to receive FDI can borrow under ECB.
  • Minimum Average Period 3 years for all ECBs, except the borrowers specifically permitted in the circular to borrow for a shorter period.
  • Borrowers can raised ECBS up to $750M per FY atomically.
  • Any entity who is a resident of a country which is FATF or IOSCO (International Organisation of Securities Commission) Compliant will be treated as a recognized lender.
  • Introduction of delay in prescribed reporting under the ECB for late submission fee work to obviate the need for compounding these contraventions.

Types of ECB-

There are two types of ECB:

  • Foreign Currency Denominated ECB– in any freely convertible foreign currency-

Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; FCCBs; FCEBs and Financial Lease.

  • Rupee Denominated ECB– In INR- Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; and Financial Lease. Also, plain vanilla Rupee denominated bonds issued overseas (RDBs), which can be either placed privately or listed on exchanges as per host country regulations.

Eligible Borrowers-

All entities eligible to receive FDI. Further, the following entities are also eligible to raise ECB:

  • Port Trusts
  • Units in SEZ
  • EXIM Bank
  • Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/cooperatives and NGOs (permitted only to raise INR ECB).

Recognised Lenders-

The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECBs.

  • Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;
  • Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
  • Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs and FCEBs). Foreign branches / subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market-makers/traders for Rupee denominated Bonds issued overseas. However, underwriting by foreign branches /subsidiaries of Indian banks for issuances by Indian banks will not be allowed.

Minimum Average Maturity Period (MAMP)

  • MAMP will be 3 years.
  • However, manufacturing sector companies may raise ECBs with MAMP of 1 (One) year for ECB up to USD 50 million or its equivalent per financial year.
  • If the ECB is raised from foreign equity holder and utilised for working capital purposes, general corporate purposes or repayment of Rupee loans, MAMP will be 5 years.
  • The call and put option, if any, shall not be exercisable prior to completion of minimum average maturity.


  • All-in-cost ceiling per annum- Benchmark rate plus 450 bps spread.
  • Other cost-Prepayment charge/ Penal interest, if any, for default or breach of covenants should not be more than 2 per cent over and above the contracted rate of interest on the outstanding principal amount and will be outside the all-in-cost ceiling.

End Use-

The negative list, for which the ECB proceeds cannot be utilised, would include the following:

  • Real estate activities
  • Investment in capital market
  • Equity investment
  • Working capital purposes except from foreign equity holder
  • General corporate purposes except from foreign equity holder
  • Repayment of Rupee loans except from foreign equity holder
  • On-lending to entities for the above activities.

Exchange rate

  • Change of currency of ECB from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted.
  • Change of currency of FCY ECB into INR ECB can be at the exchange rate prevailing on the date of the agreement between the parties concerned for such change or at an exchange rate, which is less than the rate prevailing on the date of agreement, if consented to by the ECB lender.
  • Change of currency from INR to any freely convertible foreign currency is not

Limit and leverage

  • All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under auto route.
  • Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECBs raised under the automatic route cannot exceed 7:1.
  • However, this ratio will not be applicable if outstanding amount of all ECBs, including proposed one, is up to USD 5 million or equivalent.
  • The borrowing entities will also be governed by the guidelines on debt equity ratio issued, if any, by the sectoral or prudential regulator concerned

Parking of ECB proceeds-                                                                              

ECB proceeds are permitted to be parked abroad as well as domestically 

Loan Registration Number (LRN) –

Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Mumbai. Copies of loan agreement for raising ECB are not required to be submitted to the Reserve Bank.

Changes in terms and conditions of ECB-

  • Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB the changes should be specifically mentioned in the communication.

Monthly Reporting of actual transactions-

  • The borrowers are required to report actual ECB transactions through Form ECB-2 through the AD Category I bank on monthly basis so as to reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return.

 Late Submission Fee (LSF) for delay in reporting

LSF is levied for the delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of Form ECB 2 returns, as under:

Sr. No. Type of Return/Form Period of delay Applicable LSF
1 Form ECB 2 Up to 30 calendar days from due date of submission INR 5,000
2 Form ECB 2/Form ECB Up to three years from due date of submission/date of drawdown INR 50,000 per year
3 Form ECB 2/Form ECB Beyond three years from due date of submission/date of drawdown INR 100,000 per year

SOP for untraceable entities-

Definition: Any borrower who has raised ECB will be treated as ‘untraceable entity’, if entity/auditor(s)/director(s)/ promoter(s) of entity are not reachable/ responsive/ reply in negative over email/ letters/phone for a period of not less than two quarters with documented communication/ reminders numbering 6 or more and it fulfils both of the following conditions:

  • Entity not found to be operative at the registered office address as per records available with the AD Bank or not found to be operative during the visit by the officials of the AD Bank or any other agencies authorized by the AD bank for the purpose
  • Entities have not submitted Statutory Auditor’s Certificate for last two years or more;

Action on untraceable entities-

Actions to be taken by the AD Bank in respect of ‘untraceable entities;

  • File Revised Form ECB, if required, and last Form ECB 2 Return without certification from company with ‘UNTRACEABLE ENTITY’ written in bold on top. The outstanding amount will be treated as written-off from external debt liability of the country but may be retained by the lender in its books for recovery through judicial/ non-judicial means;
  • No fresh ECB application by the entity should be examined/processed by the AD bank;
  • ED should be informed.
  • No inward remittance or debt servicing will be permitted under auto route.

Conversion of ECB into Equity-

Covered under the automatic route or Government approval is received with the lender’s consent & with no additional cost, compliance with sector cap Applicable pricing guidelines for shares are complied with;

Reporting to the RBI:

  • Partial conversion, the converted portion to be reported in Form FC-GPR & balance in ECB 2 (COI) with suitable remarks, viz., “ECB partially converted to equity”.
  • Full conversion, Form FC-GPR, and Form ECB 2 Return should be done with remarks “ECB fully converted to equity”. No further ECB-2 required.
  • Conversion of ECB into equity in phases, reporting through Form FC-GPR and Form ECB 2 Return will also be in phases.
  • Consent of other lenders, if any, to the same borrower is available or at least information regarding conversions is exchanged with other lenders.
  • For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.

IV. Overseas Direct Investment (ODI)

  • Overseas Investment in JV/WOS is an important avenue for promoting global business by Indian entrepreneurs.
  • Routes- automatic and approval routes
  • Method of investing- capital contribution, subscription, transfer, purchase of listed shares
  • Who are Indian Party- Company, LLP, Reg. Partnership, Body created under Act of Parliament, resident individual
  • Investment into- Joint Ventures/ Wholly Own Subsidiary companies abroad.
  • Financial commitment- not exceeding 400% of net worth of the Indian Party
  • Ceiling- USD1 Billion – prior approval if Financial Commitment is above
  • Overseas JV/ WOS shall carry out bonafide activity permitted as per the law of the host country.
  • Indian Party shall not be on the Reserve Bank’s exporters’ caution list / list of defaulters/ under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority.
  • The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an AD to be designated by the Indian Party
  • For switching over to another AD, an application shall be made to RBI after obtaining an NOC from the existing AD.
  • ODI in Pakistan is allowed under the approval route.
  • ODI in Nepal can be only in Indian Rupees. ODI in Bhutan are allowed in Indian Rupees and in freely convertible currencies.
  • ODI in FAFT identified Jurisdictions “Call for action” is prohibited.

ODI components-

Equity/ CCPS, Debt- convertible/non-convertible preferential shares/ Debentures, Loan, Guarantee.

  • A loan given to overseas JV/ WOS may be converted into equity/ CCPS under the automatic route and reported to RBI through the designated AD bank.
  • Conversion of loan into preference shares (other than CCPS) need not be reported to RBI. Conversion of equity to loan or preference shares needs prior approval of RBI
  • Shares in overseas JV/WOS can be held in individual partner’s name if required under the host country laws
  • Listed companies may undertake Portfolio investment up to 50% of their net worth in (i) shares and (ii) bonds / fixed income securities, rated not below investment grade by accredited / registered credit rating agencies, issued by listed overseas companies

Sources of funding-

Market Purchase, Swap of shares, ADR/GDR exchange/ proceeds from ECB, Capitalisation of exports, balance held in EEFC account, proceeds of ADR/GDR issue

Obligation of Indian Party-

  • Receiving share certificates/documentary evidence in r/o investment and submission of it to the designated AD within 6 months from the date of remittance
  • Repatriation of all receivables due in r/o investments made
  • Compliance with the reporting requirement ( Form ODI/APR);
  • Repatriation of disinvestment proceeds
  • File Annual Performance Report (APR) for each JV, WOS- 31st December every year.
  • File Annual Return on Financial Liability and Assets (FLA)- by 15th July every year.

Liberalised Remittance Scheme (LRS)

  • Any Resident can remit $250,000 in a financial year: for any current or capital account transactions.
  • The Scheme is only for individuals (not for corporate, trusts firms, etc);
  • Requirement- PAN No & 1 year banking relation.
  • An application cum declaration has been prescribed.

Latest (individual)

  • Resident can gift shares / Debentures up to USD 50,000 per financial year;
  • Sale proceeds of FDIs can be credited to NRE / FCNR account;
  • Gift to NRIs can be credited to NRO account in Rupees;
  • Loans to close relatives can be given in Rupees;
  • Residents can repay the loans given to close relatives;
  • Residents can bear Medical Expenses of NRIs (close relatives);
  • FNCR (B) allowed in permitted currencies.
  • Income and sales proceeds of assets held abroad under LRS need not be repatriated on return to India.

 Disclaimer: This article has been prepared in good faith on the basis of information available on the date of publication without any independent verification. The Author does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. The Author will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person using or relying on information in this publication. Readers are requested to consult a professional before taking any action.

(Author – Sonika Bharati, FCS, LLB, is a Company Secretary in Practice from Delhi and can be contacted at


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June 2024