GLOBAL TAX ADVISORY SERVICES

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Foreign Investment in India
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Contents

1 FDI and Process of Liberalization

2 Methods of Investments

3 Investment regulations

4 External Commercial Borrowings

5 Key Press notes

6 Case studies

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FDI and Process of liberalization

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Foreign Direct Investment

FDI means investment in India by way of:

• Equity Shares;
• Redeemable Preference Shares, including convertible Preference
Shares ; and
• Convertible Debentures.

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FDI - The Roadmap…

Sectoral caps raised;

Conditions relaxed;

Up to 100% under
‘Automatic Route’ in
all sectors except
a small negative list
Up to 74/51/50%
in 111 Sectors under
‘Automatic Route’
100% in some sectors
Up to 51%
under ‘Automatic
Route’ for
35 Priority Sectors

Allowed selectively
up to 40%

Pre 1991 1991 1997 2000 Post 2000

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Methods of Investment

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How do you Invest in India?
FDI in India can be undertaken through two routes:

• No prior permission required. Only requirement to inform

Automatic Route Central Bank (‘Reserve Bank of India’) within 30 days of inflow /
issue of shares

• Prior government (ie Foreign Investment Promotion Board)

(‘FIPB’) approval needed. The approval required for FDI in the
following cases:
– Where provisions of Press Note 1(2005 Series) are attracted; or
– Proposals for foreign equity beyond 24% in SSI reserved sector; and
Government Approval – Proposals falling outside notified sectoral policy/ caps
Route Decision generally communicated within 6-8 weeks. Intimation
as
mentioned in automatic approval route still needs to be
complied
with

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Prohibited Transactions

• Foreign Direct Investment prohibited in the following sectors

– Business of chit fund, or Nidhi company;
– Agricultural or plantation activities;
– Multi-brand retail trading;
– Real estate business, or construction of farm houses (excluding development
of townships, construction of residential/commercial premises, roads or
bridges); or
– Trading in Transferable Development Rights (TDRs)

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FDI – Automatic route

Majority of the sectors under the Automatic route. Illustrative list where 100%
FDI permitted under the Automatic route:

Manufacturing Infrastructure Services

Electricity generation,
Food processing Hospitals
transmission and distribution

Electronic hardware Mass Rapid Transport System Software development

Pollution control and

Roads and highways Tourism
management

Drugs and pharmaceuticals Vehicular bridges Engineering services

Automobiles and ancillaries Ports and harbours Architectural services

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Investment Regulations

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Forms of Investment

Under FDI, non-resident investor can invest in Indian Company, (investment in

partnership not allowed) in the following manner

Equity Shares Fully Convertible Debenture

No restriction on dividend repatriation No rate of interest prescribed

Redeemable preference shares (‘RPS’)/ Convertible preference shares

Dividend pegged at SBI’s PLR+3%

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key considerations

• Share Allotment money should be remitted to the Indian company’s bank

account;
• Redemption price of preference shares, not to exceed the issue price*
• Preference shares, not be redeemed before 5 yrs*
• Investment in Redeemable preference shares, not to be counted for calculation of
sectoral caps
• External Commercial Borrowing/ royalty payments, permitted to be converted into
shares under the automatic route
• FIPB does not consider favourably applications for allotment of shares, for
consideration other than cash, except swap of shares

* According to the internal guidelines of Ministry of Finance and past approvals

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Valuation – Issue / transfer of shares to Non resident

-For acquisition of shares of an existing Indian company by non-resident, from

resident, or
-Fresh issue of shares to non-resident by an Indian Company,
the price of shares should not be less than:

Listed Companies Unlisted Companies

As per SEBI Guidelines As per erstwhile Controller of Capital Issue
i.e. Ruling market price (‘CCI’) Guidelines i.e. average of Net Assets
Value and Profit Earning Capacity Value

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Procedural formalities for issue and transfer of Shares….

Issue of Shares
• Receipt of Share Application Money - Intimation to be filed with RBI in specified format within 30 days of
such receipt
• Allotment of Shares – Declaration, in Form FC-GPR to be filed with RBI with in 30 days of such
allotment along-with the following documents:
– Valuation certificate from a Chartered Accountant;
– Foreign inward remittance certificate;
– Compliance certificate from a Company Secretary.

Transfer of Shares (From Resident to a Non-resident)

• Form FC-TRS required to be filed with the authorised dealer of the resident transferor. The following
documents are generally required to be submitted along-with the Form:
– Valuation certificate from a Chartered Accountant
– Foreign Inward remittance certicate
– Consent letter from the resident shareholders
• Transfer of shares of an Indian company from Non resident to a Resident is not FDI
– Formalities as in Transfer of Shares, as mentioned above
– Tax declaration/ No objection certificate from Income tax authority required
• Capital Reduction and Buy Back of Shares, covered under the general pemission
• Remittance of residual funds on liquidation requires prior RBI approval

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Transfer of Shares….

General permission has been granted to the following:

• Transfer shares of an Indian Company from NR to another NR (including NRIs) by way of Sale*
• NRI to NRI by way of Sale*
– No valuation requirement
– Only intimation required to be submitted with RBI (with FIPB in case approval has been obtained FIPB )

*Prior permission from FIPB required if Transferee has an existing venture in same field.

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Royalty payments
• Royalty payments permitted for remittance
– for use of manufacturing process, technical know how, design and drawing etc, covered
under a foreign technology collaboration agreements.
• Under the automatic route royalty payments allowed maximum of :
– Lump sum payment of US$ 2 million; and/or
– Recurring royalty payment upto 5% of domestic sales and 8 % of exports
• Royalty payments allowed without any limitation on tenure
• Royalty payment on trade mark/ brand name restricted to 1% of domestic sales and
2% of exports
• In case of technology transfer and trade mark/ brand name, maximum royalty
allowed under automatic route 5% of domestic sales and 8% of exports
• Royalty payments, as percentage of sales, to be calculated through a prescribe
formula (to be restricted to value addition)
• Prior FIPB/ PAB approval required, if above limits are to be breached

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FDI in key Sectors

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Telecom

• The composite limit includes investments by

• 49% Automatic FIIs, NRIs, FCCBs, ADRs, GDRs, convertible
Basic & Cellular,
preference shares, proportionate foreign
• Beyond 49% but
ILD, NLD etc
upto 74%
investment in Indian promoters/investment
Approval companies including their holding
companies, etc.
• At least one serious Indian promoter to hold
at least 10% of the equity
• Key officials of the company e.g. Managing
director, Chief Executive officer, Chief
Technical officer, Chief Financial Officer,
should be resident Indians
• Investment through setting up intermediary
Indian holding company would also be
considered while calculating the FDI ceiling
• 49% Automatic
ISP with Gateways • Beyond 49% upto 74% • Conditions notified by DOT
Approval

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Telecom….

• 26% divestment to Indian parties in

ISP without
• 49% Automatic 5 years, in case of listed foreign
• Beyond 49% Approval
Gateways company
• Conditions notified by DOT

Manufacture • 100% Automatic

of Telecom
Equipments

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Real Estate
FDI backed projects would be accorded national treatment at par with local developers - State Government’s/ Municipal bodies will now approve projects
for construction-development involving foreign investment.

• Minimum 10 hectares to be developed for serviced housing plots

Development • For construction-development projects, minimum built-up area of 50,000 sq mts

Criteria prescribed
• In case of a combination project, any one of above two conditions would suffice
• At least 50% of project to be developed within 5 years from date of statutory
clearance
• Minimum capitalization of US$ 10 mn for wholly owned subsidiaries & US$ 5 mn for
joint ventures with Indian partners
Investment • Funds to be brought in within 6 months of commencement of business
Conditions • Original investment cannot be repatriated before a period of 3 years from
completion of minimum capitalization. Investor may be permitted to exit earlier with
prior Government approval
• Investor not permitted to sell undeveloped plots**
• Project to conform to norms & standards laid down by respective State authorities
Other Conditions • Investor responsible for obtaining all necessary approvals as prescribed under
applicable rules/bye-Iaws / regulations of the State
• Concerned Authority to monitor compliance of prescribed conditions by developer
* As per Press Note 2 (2005 series) dated March 3, 2005
** “Undeveloped” plot means where roads, water supply, street lighting, drainage, sewerage & other conveniences have not been made available. It will be necessary
that investor provides this infrastructure & obtains a completion certificate prior to sale of serviced housing plot

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Trading

Wholesale
cash & carry • 100% Automatic*

Trading for Exports

• 100% Automatic

Trading of items
• 100% Approval
sourced from SSIs

Test Marketing • 100% Approval

of Items

* Details in next slide

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Whole sale cash & carry

Sailent features of Whole sale cash & carry:

• Sale on a business-to-business basis, and not for personal consumption
• Sale to Wholesalers/ retailers/Institutional/ Industrial customers/ professionals etc, for their business
purposes
• Goods not necessarily required to be sold in bulk,
• Normal trade credit allowed to be extended

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Trading….

Single Branded Conditions:

Product Retailing • 51% Approval
• Single brand
• Sold under same brand
internationally
• Branding during
manufacturing process

Norms:
Application to be made to SIA in Department of Industrial Policy & Promotion
Application to indicate product / product category
Further additions require fresh approval

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Non Banking Financial Companies

Non Banking
Finance Companies • 100% Automatic

Capitalization:
Merchant banking, Fund based NBFC:
Underwriting, Portfolio • FDI up to 51% - US$ 0.5 million upfront
Management Services,
• 51% to 75% - US$ 5 million upfront
Financial Consultancy, Stock
Broking, Asset Management, • 75% to 100% (upto US$ 50 million) - US$ 7.5 million upfront
Custodial Services, Factoring, (remaining in 24 months)
Credit Reference Agencies, Non-fund based NBFC : US$ 0.5 million
Credit rating agencies,
• 100% operating subsidiaries can establish operating
Leasing & Finance, Housing
subsidiaries without bringing additional capital.
Finance, Forex Broking,
Credit Card business, Money • Joint ventures with 75% or less than 75% foreign investment will
changing Business, Micro also be allowed to set up subsidries subject to satisfying
Credit, Rural credit capitalisation norms

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Key Press Notes

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Press Note 1 (2005 series) - A very progressive move…..

Press Note 18….The story so far Press Note 1….The reform

• Automatic approval for foreign / • Prior approval of FIPB / PAB needed
technical collaboration not available to only when the foreign entity has an
foreign entities who have or had any existing collaboration in the
previous financial or technology “same” field
transfer / trademark agreement in the
same or allied field • FIPB / PAB approval not required,
even in case of “existing” ventures in
• Necessary approval required from “same” field in certain cases
FIPB / PAB for new collaboration
• The note recommends a “conflict of
• Foreign entities to provide justification interest” clause in all future
that the proposal would not jeopardize Press Note financial / technical collaborations to
the interests of existing joint venture 18 was safeguard interest of joint venture
partner or other stake holders detrimental to partners in a way if the foreign
foreign company investing for the first time
investment! in India after issuance of the note, no
approval required if the sector is
under the automatic route

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Press Note No. 9 (1999 series)

• Foreign owned Indian Holding Companies require prior approval of

FIBP/Government for acting as a Holding Company
• For all practical purposes the Holding Company treated as a Foreign Company
• Sectoral caps applicable for investment by Indian Holding Company
• Upon receipt of FIPB approval for acting as a Holding Company, the Indian
Holding Company can make downstream investment under the automatic route
provided the Indian Company is engaged in the activities qualify for automatic
route
• Holding Company not allowed to leverage funds from the domestic market
• Holding Company can invest by way of its retained earnings
• To qualify as a foreign owned Indian holding company, foreign investment in
India company required to be in excess of 50%*

* Informal clarification from the government

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Case Studies

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Case Studies
A Foreign company proposes to set up a wholly owned subsidiary, which will be engaged in the
business of trading of heavy machineries, which are used in car manufacturing.

QQQ: Will such activity be allowed under automatic route/ approval route or is it a prohibited activity.

A Foreign company has established a 51% JV with an Indian partner in January 2004, for
manufacturing cars. The said Foreign company then proposes to set up a wholly owned subsidiary in
January 2007, for manufacturing a similar product i.e. cars.

QQQ Whether approval from the FIPB would be required for setting up of the wholly owned subsidiary.
If yes, then, would the answer differ, if in case the Foreign company has obtained an NOC from Indian
partner for setting up the wholly owned subsidiary.

A Foreign company proposes to set up a wholly owned subsidiary in India , for manufacturing mobile
handsets. The Foreign company, further proposes to sell its product through its own retail stores.

QQQ For carrying out the activity of selling handsets through own stores, whether FIPB approval is
required or is it prohibited activity, since investment in Singe Brand retail trading is restricted to 51%.

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Case Studies

A Foreign company proposes to set up a wholly owned Operating cum Holding

company in India (ICo1). ICo 1 decided to invest in another Indian company (ICo2)
which is engaged in a sector which falls under the automatic route.

QQQ Whether FIPB approval is required for such investment in Co2. In case the
answer is yes, then, will another approval be required by Co1, if it were to invest in
other companies which fall under the automatic route.

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 Foreign Exchange Management Act, 1999

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Contents

1 Structuring of sections and important definitions

2 Categorization of transactions

3 Business Presence in India

4 NRI investment on non-repatriation basis

5 External Commercial Borrowings

6 Export and import regulations

7 Outbound investments

8 Case Studies

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Structuring of sections and important definitions

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Structure

Section 2 Definitions

Regulation & Management of

Section 3 - 9
Foreign Exchange

Provisions relating to
Section 2(c) & 10 - 12
Authorised Persons

Section 13 - 15 Contravention & Penalty

Section 16 - 35 Adjudication & Appeals

Section 36 - 38 Enforcement Directorate

Section 39 - 49 Miscellaneous

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Important definitions

• Foreign exchange (“Forex”) – Sec 2(n) means

– Foreign currency
– Credit card
– Deposits, credits and balances in foreign currency
– Drafts, traveler's cheques, LOC, BOE expressed/ drawn in Indian currency but payable
in foreign currency
– Drafts, traveler’s cheques, LOC, BOE drawn by non-resident but payable in Indian
currency
• Person – Sec 2(u) includes
– Individual, HUF, Firm, Company, AOP/ BOI, Artificial juridical person
– The term includes any agency, office or branch owned/ controlled by such person
• Person resident outside India (“PROI”) – Sec 2(w)
– Any person other than a person resident in India

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Important definitions…
• Person resident in India (“PRII”) – Sec 2(v)
– Individual who stays in India for more than 182 days during the previous financial year:

a) Employment outside India

b) Carrying on business/ vocation outside India
c) Other purpose with an intention to stay PROI
Gone out of
outside for an uncertain period
India or stays
Outside India
for
Any other purpose - PRII

a) Employment in India
b) Carrying on business/ vocation in India PRII
Comes to c) Other purpose for an uncertain period
India or stays
in India
for
Any other purpose - PROI

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Important definitions…

• Firm/ body corporate/ AOP/ BOI

– Registered or incorporated in India – PRII
– Registered or incorporated outside India – PROI
• Agency/ office/ branch
– In India – PRII
– Outside India
• Owned/ controlled by resident in India – PRII
• Owned/ controlled by resident outside India – PROI

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Important definitions…

• Currency – Sec 2(h) includes

– Currency notes, money order, cheques, DD, instruments, traveler's cheques,
letter of credit, credit cards, BOE, promissory notes
– The term includes debit cards and ATM cards
• Authorised Person – Sec 2(c)
– Means an AD, money changer, offshore banking unit or any other person
authorized under Sec 10(1) to deal in forex or foreign securities

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Important definitions…

• Repatriate to India – Sec 2(y)

– Means bringing into India the realised foreign exchange and
• The selling of such foreign exchange to an authorized person in India in exchange for
rupees
• The holding of realised amount in an account with an authorized person in India to the
extent notified by the Reserve Bank
– Includes use of the realised amount for discharge of a debt or liability
denominated in foreign exchange

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 Categorization of transactions

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FEMA – Provisions

Section 3:
Except as provided in the FEMA Act, rules and RBI permission, no person
shall:
• Deal in/ transfer any forex to any person not being an authorized person
• Make any payment to or for the credit of any non resident
• Receive otherwise through an authorized person, any payment by order or on
behalf of any non resident
• Enter into any financial transaction in India as consideration for or in association
with acquisition or creation or transfer of a right to acquire, any asset outside
India by any person

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Regulation & Management

• Current account transactions – Sec 2(j) & 5

• Means a transaction other than a capital account transaction and
includes:
– Payment due in connection with foreign trade, current business, services and
short term banking and credit facilities in the ordinary course of business
– Payment due as interest on loans and as net income from investments
– Remittances for living expenses of parents, etc
– Expenses in connection with foreign travel, education, medical care of parents,
spouse and children
• Any person is free to sell and buy forex from an authorized person if
such sale or drawal is on account of a current account transaction
However, the Govt has in public interest and in consultation with the RBI
framed the Current Account Transactions Rules

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Current Account Transactions – In a nutshell

• Underlying guideline: Drawal of forex permitted unless specifically

restricted. Remittances for all current account transactions that are not
covered under the restricted list permitted by the ADs without any
monetary/ percentage ceilings
• Restricted list consists of three categories of transactions
– Prohibited transactions
– Transaction permitted against specific approval of relevant ministry/ Govt
department
– Transactions requiring prior RBI approval
• For transactions made out of resident foreign currency accounts,
restrictions contained in categories II and III will not apply
• Further, certain restrictions would also not apply to drawals from EEFC
accounts

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Current Account Transactions

Schedule I – Prohibited transactions

Drawal of forex prohibited for
• Transactions with (including travel to) Nepal or Bhutan
• Payment of commission on exports made towards equity investments in
JVs/ WOSs abroad of Indian companies
• Payment related to “Call back services” of telephones
• Remittance for purchase of lottery tickets, banned/prescribed magazines,
football pools, sweepstakes etc.
• Remittance of income from racing, riding or any other hobby
• Remittance out of lottery winnings
• Remittance of dividend by any company to which the requirement of
dividend balancing is applicable

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Current Account Transactions

Schedule II - Transactions permitted against specific approval of

relevant Ministry/ Government Department
• Remittances under technical collaboration agreements for payment of technical know how
fees exceeding US$2 million and royalty exceeding 5% on domestic sales and 8% on exports
(Use of brand name or trade marks - royalty permitted at 2% for exports/ 1% for domestic
sales)
• Multi modal transport operators making remittance to their agents abroad
• Remittance of hiring charges of transponders/ Cultural tours
• Payment for securing health insurance from a company abroad etc. (Separate regulation on
insurance provides that permission of RBI is required for securing life insurance from a
company abroad)
• Remittance of prize money/sponsorship of sports activity abroad by a person other than
International/National/State Level sports bodies, if the amount involved exceeds US$ 100,000
• Advertisement in foreign print media for the purposes other than promotion of tourism, foreign
investments & international bidding (exceeding US$ 10,000) by a State Govt. & its PSU

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Current Account Transactions

Schedule III - Transactions requiring prior RBI approval

• Release of forex exceeding:
– private visits to any country (except Nepal and Bhutan) per financial year
exceeding US$ 10,000
– US$ 100,000 for employment abroad
– US$ 100,000 for emigration
– US$ 100,000 for maintenance of close relatives abroad
– **Persons resident but not permanently resident in India, being a foreign
national may remit 100% of their net salary for maintenance of close relatives
abroad

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Current Account Transactions

• Remittances exceeding US$ 1 million per project for any consultancy

services procured from outside India
• Remittances exceeding US$ 0.1 million for reimbursement of
pre-incorporation expenses
• US$ 100,000 for education abroad
• Forex exceeding US$ 25,000 per person for business travel or attending
a conference, specialized training

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Capital Account Transactions Sec 2(e) & 6

Definition
• Transaction that alters the assets and liabilities, including contingent
liabilities, position:
– Outside India for a person resident in India
– In India from a person resident outside India
• Any person may sell/ draw forex to/ from an authorized person for
permissible capital account transactions, subject to limits specified by
RBI (Sec 6(2))
• RBI can prohibit, restrict (or) regulate certain transactions (Sec 6(3))
• Person resident in India (PRII) can hold/ own/ transfer/ invest in foreign
currency/ security/ immovable property outside India, if they are
acquired/ held when he was Person resident outside India (PROI)

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Regulation & Management

• PROI can hold/ own/ transfer/ invest in foreign currency/ security/

immovable property in India , if they are acquired/ held when he was
PRII (or) inherited/ gifted from PRII
• RBI has got the power to prohibit/ restrict/ regulate, branch/ office agency
in India established by PROI

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Regulation & Management

Underlying guideline: RBI allowed to specify in consultation with the

Central Govt, classes of special account transactions and drawal of forex
from an Authorised Person in the Schedules
• Capital Account Transactions are classified as follows:
– Transactions relating to persons resident in India (listed in Schedule I)
– Transactions relating to persons resident outside India (listed in Schedule II)
– Prohibited transactions (chit fund, nidhi company, agricultural, plantation
activities, construction of farm houses, etc

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 Business Presence in India

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Forms of Business Presence

• Liaison Office (Short Term) -

– Acts as channel of communication between HO and Indian entities
– Does not undertake any commercial / trading / industrial activity, directly or
indirectly
– Maintains itself out of inward remittances received from abroad through normal
banking channel
• Project office (Specific purpose) –
– represents the interests of the foreign company executing a project in India
• Branch office (Medium term) –
– established for undertaking permitted commercial activities

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Permitted activities

• Permitted activities for Liaison offices

– Representing in India the parent company/ group companies
– Promoting export/ import from/ to India
– Promoting technical/ financial collaborations between parent/ group companies
and companies in India
– Acting as a communication channel between the parent company and Indian
companies
• Permitted activities for Project offices
– Limited to execution of a particular project in India

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Permitted activities…

• Permitted activities for Branch offices

– Export/ import of goods
– Rendering professional/ consultancy services
– Carrying out research work, in which the parent company is engaged
– Promoting technical or financial collaboration between Indian companies and
parent or overseas group company
– Acting as buying/ selling agent in India
– Rendering services in IT and development of software in India
– Rendering technical support to the products supplied by parent/ group
companies

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Set – up/Compliances of a LO/BO

• Prior approval from RBI in Form FNC 1 required for opening of above
offices
• Office required to be registered with Registrar of Companies within 30
days of its establishment
• Auditor’s certificate to be filed annually with RBI confirming compliance
with terms and conditions of RBI approval
• Annual filing of global and Indian accounts with ROC
• RBI approval required at the time of closure of office

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Setting up of Project office

• Foreign companies granted general permission to set-up project offices in India

without any approval in certain cases subject to certain conditions:
– it has secured from an Indian company a contract to be executed in India; and
– the project is funded by inward remittances from abroad/ bilateral or multilateral
International financing agency; or
– the project has been cleared by an appropriate authority; or
– the company or entity in India awarding the contract has been granted term loan facility
by a PFI or bank in India.
• The foreign companies required to submit prescribed information with RBI in
relation to setting up a project office
• Inter office transfer i.e. transfer of funds between two project offices of the foreign
company required prior RBI approval
• Office required to be registered with ROC within 30 days of its establishment
• Annual filing of global and Indian accounts with ROC

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Remittance of surplus

• Branch office
– Permitted to remit its annual earnings
– Key documents for remittance of proceeds include:
• CA certificate
• Annual Accounts
• Project office
– Permitted to remit intermittent proceeds pending winding up/ completion of the
project on submission of the following documents
• CA certificate that sufficient provisions to meet Indian liabilities, including income-tax
• Undertaking from the PO that the remittance will not affect the completion of the
project and that any shortfall in funds will be met by inward remittances

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 NRI investment on non repatriation basis

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NRI investment on Non-repatriation basis

NRI includes a person of Indian origin

• Investment under this route, not considered as FDI
– Non-repatriation investment fall under Schedule IV of FEMA Notification 20; as
against FDI which is covered under FEMA Notification 20, Schedule I
• NRI can invest in all sectors except companies engaged in chit fund/
nidhi /agricultural/ plantation activities or real estate business or
construction of farm house or dealing in TDRS
• Sale proceeds of shares need to be credited into the NRO account,
which is a non- repatriable account
• Remittance of dividend to NRI is freely allowed

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 External Commercial Borrowings

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ECB – Automatic route

• ECBs include
– Commercial loans [in form of bank loans, buyers’ credit, suppliers’ credit,
securitised instruments (e.g. floating rate notes and fixed rate bonds)]
– availed from non-resident lenders
– with minimum average maturity of 3 years.
• Eligible borrowers
– Corporates registered under the Companies Act except financial intermediaries
(such as banks, financial institutions (FIs), housing finance companies and
NBFCs)
– NGOs engaged in micro finance, subject to certain conditions
– Individuals, trusts and Non profit making organization not allowed to avail ECB

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ECB – Automatic route

Recognized lenders
• Internationally recognized sources such as
– international banks, international capital markets, multilateral financial
– institutions (such as IFC, ADB, CDC etc),
– export credit agencies
– suppliers of equipment, foreign collaborators
– foreign equity holders
• ECBs Upto US$ 5 mn – minimum 25% equity
• ECBs > US$ 5 mn – minimum 25% of equity & debt-equity ratio not exceeding 4:1
• Overseas organizations and individuals, on complying with certain
prescribed safeguards, may provide ECB to NGOs engaged in micro
finance activities

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ECB – Automatic route…

Permissible amount Minimum maturity (years)

Upto US$ 20 mn 3
US$ 20 – US$ 500 mn 5

• Maximum permissible ECB is US$ 500 mn during any financial year

• Upto US$ 20 mn can have call / put option provided the average maturity of 3
years is complied before exercising call / put option
• Maximum ECB by a NGO engaged in micro finance – US$ 5 mn during a
financial year

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ECB – Automatic route…

All-in-cost ceilings
• Includes interest, other fees, expenses in foreign currency except commitment
fee, pre-payment fee, and fees payable in Indian Rupees.
• Withholding tax burden in Indian rupees is excluded

Minimum Average Maturity Period All-in-cost ceilings over six month

LIBOR (for the respective currency of borrowing)
3 years and up to 5 years 200 basis points
> 5 years 350 basis points

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ECB – Automatic route…

Permissible end-use
• Investment (import of capital goods, new projects, modernization/ expansion of
existing production units) in real sector ie industrial sector including small and
medium enterprises (SME) and infrastructure sector - in India
• Overseas direct investment in joint-venture/WOS
• First and second stage acquisition under Government’s disinvestment program of
PSU shares
• NGOs may use ECB proceeds for lending to self-help groups or for micro-credit
or for bonafide micro finance activity
Restricted use
• On-lending or investment in capital markets, or acquiring stake in a company
• Investment in real estate (excluding integrated townships of 100 acres of more)
• Working capital, general corporate purposes & repayment of existing INR loans

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ECB – Automatic route…

Parking of ECB proceeds overseas

• To be parked overseas until actual requirement in India
Prepayment
• Prepayment upto US$ 300 mn permitted subject to compliance with stipulated
minimum average maturity period
Conversion of ECB into equity
• General permission has been granted by the RBI for conversion of ECB into
equity, subject to the following:
– The activity of the company is covered under the automatic route for
– FDI or they had obtained Government approval
– The foreign equity is within the sectoral cap, if any, after conversion
– Pricing is as per SEBI guidelines/ erstwhile CCI regulations for
– listed/ unlisted companies respectively

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ECB – Automatic route…

Refinance
• Permitted subject to the condition that outstanding maturity of original
loan is maintained
Procedure
• The borrower to comply with reporting requirements (ie Form 83 etc) .
Borrower’s responsibility to ensure that ECB raised /utilised are in
conformity with ECB guidelines and the RBI’s regulations

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ECB – Approval route…

Eligible borrowers
• Financial institutions dealing exclusively with infrastructure or export finance (Notified
SPVs, set up to finance infrastructure companies/projects exclusively treated as financial
institutions)
• Banks and financial institutions which had participated in the textile or steel sector
restructuring package
• NBFCs can raise ECB of minimum average maturity of 5 years to finance import of
infrastructure equipment for leasing to infrastructure projects
• Multi-state Co-operative societies, subject to certain conditions
• Cases falling outside the purview of the automatic route limit and maturity period
Other
• Internationally recognized sources (same as automatic route) except that foreign equity
holders to hold minimum 25% of equity & debt-equity ratio not exceeding 4:1 irrespective of
ECB amount
• Applications for providing guarantee, standby letter of credit, letter of undertaking by banks,
financial institutions relating to ECB in the case of SME to be considered on merit subject to
prudential norms

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 Export Of Goods And Services

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Export regulations

• Export trade regulated by Directorate General of Foreign Trade

• Authorized dealer to ensure compliance of foreign trade policy by the exporter
• Exporters required to submit prescribed documents with the banker at the time of
exports eg SOFTEX at the time of software export
• Exporters allowed to keep its foreign exchange earning in Exchange earners
foreign currency account
• Export of goods on lease/ hire purchase basis required prior approval
• Export proceeds need to be realized within a period of six months
• Exporter registered as status holders and units registered in EOU/
STPI/EHTP/BTP can realized export proceeds within a period of 12 months
• No time period for export realization applicable on SEZ

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Export regulations

• Export proceeds realization period can be self extended provided it does not
exceeds 10% of the export proceeds due during the calendar year
– In other cases, an application in form ETX required to be submitted with RBI
• Exporter allowed to receive advance payments, provided goods are shipped
within a period of 1 yr
• Exporter allowed to pay agency commission to overseas agent
• Netting off not allowed ie export proceeds cannot be set off against import
payable except in case of SEZ units
• Self write off allowed provided it does not exceeds 10% of the export proceeds
due during the calendar year

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 Import Of Goods And Services

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Import regulations

• Import trade regulated by Directorate General of Foreign Trade

• Authorized dealer to ensure compliance of foreign trade policy by the importer
• Importers required to submit prescribed documents with the banker for effective
the import payment eg bill of entry
• Remittance against import needs to be effected with in a period of six months
from the date of shipment
• Import payment exceeding six months but less than 3 years considered as trade
credits
• Authorized dealer can effect the remittance exceeding six months if satisfied,
delay is on account of financial difficulties/ disputes etc
• Advance against import allowed without any security if less than USD 100,000
• Goods needs to be imported within a period of six months of advance payment

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Import regulations

• Interest can be paid on usuance bill for a period of less than three years
• Trade credit upto USD 20 million allowed by the authorized dealer with import
payment to be completed within a period of one year, three years for import of
capital goods
– No rollover/ extension allowed beyond permissible limit
– All in cost ceiling for one year LIBOR+ .5% and for more than one year but less than
three years LIBOR +1.25%
• Mercantile trade ie movement of goods from overseas buyer to overseas seller
by an Indian customer is allowed, provided following conditions satisfied:
– The goods involved are importable
– Import payments needs to be extinguished with export remittance, and export payment
should be received within a period of three months from the date of import payment
– Entire transaction completed within a period of six months

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Outbound Investments

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Outbound investment

An Indian Party* is permitted to make investment in overseas joint venture (JV)/ wholly owned
subsidiary (WOS) engaged in bona-fide business activity under the general permission of RBI
• The Investment in overseas JV / WOS is permitted upto 200% of its net worth (paid up capital and free
reserves) as on the date of the last audited balance sheet in any one financial year. The above ceiling
includes the following:
– Contribution to the capital of overseas JV/ WOS
– Loan granted to JV/ WOS
– 50% of the guarantee issued to or on behalf of the JV/ W OS
– Indian Party is prohibited to make direct investment in a foreign entity engaged in:
– Real estate business; or
– Banking business
Indian Party means:
• A company incorporated in India; or
• A body created by act of Parliament; or
• A partnership firm registered under the Indian Partnership Act., 1932; or
• Any other entity in India as may be notified by RBI.

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Methods of funding

• Funds held in Exchange Earner Foreign Currency Account (‘EEFC’);

• Foreign exchange drawl from an authorized dealer in India
• Capitalization of export proceeds and other dues and entitlement;
• Utilization of ADRs/ GDR proceeds
• Utilization of ECB/ FCCB proceeds
• Swap of shares

Monetary ceiling of 200% of net-worth will

not be applicable if the overseas investment
is made out of the EEFC account and
utilization of ADRs/ GDRs proceeds

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Additional conditions for general permission

• Indian promoter does not have any outstanding dues by way of dividend,
technical know-how fees, royalty, consultancy, commission or other
entitlements, and / or export proceeds from the JV / WOS
• Indian party has submitted up-to-date Annual Performance Reports
(‘APR’) in respect of all its overseas investments
• Indian party is not under investigation by CBI / ED / SEBI / IRDA or any
other regulatory authority in India
• Indian party is not under the exporter’s caution list
• Indian party routes all transactions relating to a investment in JV/ WOS
through only one branch of an AD (for different overseas investments
different AD can be designated)

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Valuation Norms

Investments in existing shares of a foreign company is permitted

subject to:
• Where investment exceeds USD 5 million, valuation of shares of Foreign
Company is required to be carried out by a registered category I
Merchant Banker or a registered Investment Banker / Merchant Banker
outside India; and
• In all other cases by a CA / CPA
• In case overseas investment is undertaken through swap of shares, in
that case the valuation of the shares of the Foreign Company would be
carried out by a Category I Merchant Banker registered with SEBI or an
investment banker/ Merchant Banker outside India registered with the
appropriate regulatory authority in the host country

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Overseas Investment in a Financial services

Investment by Indian Party engaged in Financial services in Financial

services overseas or otherwise, following additional conditions are
required to be registered:
• Registered with the appropriate regulatory authority in India for
conducting the financial sector activities and complied with prudential
norms
• Earned net profit during the preceding three financial years from
undertaking the financial activities
• Obtained approval for investment in financial sector activities abroad from
concerned regulatory authorities in India an abroad
• Prior approval from RBI would be required in case Indian party is not
meeting the criteria for overseas investment under the general permission

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Outbound investment

Overseas investment by a registered partnership firms in India

• Registered Partnership firms having a good track record are permitted to
make investment in overseas JV / WOS provided such investment does
not exceed 200% of the net worth of the firm in a financial year
Post investment changes / additional investment in existing JV/WOS
• A JV / WOS set up by the Indian party may diversify its activities / set up
step down subsidiary / alter its shareholding pattern subject to the Indian
party reporting to the RBI in the prescribed manner, the details of such
decisions

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Outbound investment

Transfer by way of sale of shares of a JV/WOS

• An Indian party may transfer by way of sale to another Indian party or to a person resident outside India,
any share or security held by it in a JV / WOS outside India subject to certain conditions and reporting
requirements
• In case the disinvestment result in a write-off of the capital invested prior approval is not required
provided:
– Overseas JV/ WOS is listed in the overseas stock exchange;
– Indian promoter company is listed on a stock exchange in India has a minimum of Rs 100 crore net worth
– Where the Indian promoter is unlisted company and investment in overseas venture is less than USD 10 million
Conditions governing transfer by way of sale of shares of a JV / WOS
• Sale is to be effected through a stock exchange where the shares of the overseas JV / WOS are listed
• Where shares are not listed and the disinvestment is by private arrangement, the sale price of the share
is not less than the value certified by a CA / CPA / Category I Merchant Bank registered with SEBI
• Valuation guidelines need to be adhered even if the shares are transferred from one Indian party to
another

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Outbound investment in listed company/ rated
bonds
• Listed Indian companies are permitted to invest abroad in companies, (a)
listed on a recognized stock exchange, and (b) which has the share
holding of at least 10% in an Indian company listed on a recognized
stock exchange in India (as on 1st January of the year of the
investment). They are also permitted to invest in rated bonds / fixed
income securities. Such investments shall not exceed 25% of the Indian
company’s net worth as on the date of latest audited balance sheet
• General permission is available to the above categories of investors for
sale of securities so acquired

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Other investments

• The resident individual can acquire shares of a foreign company through

employee stock option scheme
• The scheme can either be a cash less or cash scheme
• The scheme can be availed by an employee/ director of an Indian entity
in which stake of the foreign company directly/ indirectly is not less than
51%
• Concession for the ESOP can either be borne by the foreign company or
the Indian company
• The resident individual allowed to remit USD 50,000 per financial year,
for any capital and current account transaction
– The above limit subsumes limit of donation and gift which were currently
allowed separately USD 5000 each

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Thank You

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