Debolina Banerjee

Background

The regulatory environment concerning the foreign investment in India has been under constant evolution. In recent times the Reserve Bank of India (RBI) has been consistently making endeavors to ensure availability of funds to India Inc. 

After the noted change was introduced by RBI on 3rd September, 2014 wherein RBI vide [1]RBI/2014-15/207 A.P. (DIR Series) Circular No.253 relaxed the ECB norms for overseas lenders by allowing them to extend loans in Indian currency, the banking regulator on 17th September, 2014 vide RBI/2014-15/234 A.P. (DIR Series) Circular No.31[2] eased the norms for issuance of Equity shares by companies to a resident outside India.

The necessary amendment to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) 2000 was carried out by insertion of new clause (iv) in Paragraph 2 of Schedule 1 vide RBI Notification No. FEMA. 315/2014-RB[3] dated 10th July, 2014 which came into force on 2nd September, 2014, the date of publication in the official gazette[4]. Relevant extracts is reproduced in italics hereunder:

Schedule I – Foreign Direct Investment Scheme

2. Automatic Route of Reserve Bank for Issue of shares by an Indian company

(4) An Indian company, otherwise eligible to issue shares under this Schedule may issue equity/preference shares, subject to pricing guidelines as given in paragraph 5 of this Schedule, to a person resident outside India,

(iv) against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA ,1999 or any rules/ regulations framed or directions issued there under, provided that: 

i. The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc. as amended by Reserve Bank of India, from time to time; 

ii. The issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes.

A crisp view on the noted progress has been discussed below.

Present Circular

Before the issuance of the recent RBI circular, Indian companies were eligible to issue shares/convertible debentures under the automatic route to a person resident outside India against the following funds:

  • Lump- sum Technical know-how fees;
  • Royalty;
  • External Commercial Borrowings (ECBs) (other than import dues deemed as ECB or Trade Credit as per RBI guidelines)
  • Import payables of capital goods by units in Special Economic Zones.

Furtherance to this the banking regulator has relaxed norms RBI/2014-15/234 A.P. (DIR Series) Circular No.31 for issue of equity shares by the Indian company. The new norm has been explained diagrammatically:

rbi fdi insurance[1] http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9210&Mode=0

[2] http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9242&Mode=0

[3] http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9241&Mode=0

[4] http://www.egazette.nic.in/WriteReadData/2014/160863.pdf

[The above post is contributed by Debolina Banerjee at Vinod Kothari & Co. She can be contacted at mt@vinodkothari.com ]

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