progression of fera to fema and how it facilitates foreign exchange market in india (3)

8/13/2019 Progression of Fera to Fema and How It Facilitates Foreign Exchange Market in India (3)

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PROGRESSION OF FERA TO FEMA AND

HOW IT FACILITATES FOREIGN

EXCHANGE MARKET IN INDIA


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SR.NO GROUP MEMBERS ROLL.NO

1 AJINKYA KHERATKAR 12005

2 CHERISHA GALA 12015

3 DHARA SHAH 12021

4 HIREN BADANI 12032

5 JAY RAMCHANDANI 120

6 MANAN BHAYANI 12053


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INDEX

SR. NO TABLE OF CONTENTS PG. NO

1 FOREIGN EXCHANGE REGULATION ACT (FERA), 1973 3

2 FOREIGN EXCHANGE MANAGEMENT ACT, 1999 13

3 CONTRAVENTION AND PENALTIES OF FEMA 17

4 FDI POLICY 18

5 EXTERNAL COMMERCIAL BORROWINGS 33

6 IMPORT EXPORT GUIDELINES 43

7 CAPITAL ACCOUNT CONVERTIBILITY 59

8 THE SOUTH-EAST ASIAN CRISIS 61

9 IMPACT ON FOREIGN EXCHANGE MARKETTREND

ANALYSIS

73

10 LONG TERM MEASURES TO CONTROL CAD 77

11 BIBLIOGRAPHY 78


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FOREIGN EXCHANGE REGULATION ACT, 1973

The Foreign Exchange Regulation Act(FERA) was legislation passed by theIndianParliament in 1973 by the government ofIndira Gandhi and came into force with effect from

January 1, 1974. FERA imposed stringent regulations on certain kinds of payments, the dealings inforeign exchange and securities and the transactions which had an indirect impact on the foreignexchange and the import and export of currency.

An Act to consolidate and amend the law regulating certain payments, dealings in foreignexchange and securities, transactions indirectly affecting foreign exchange and the import andexport of currency for the conservation of the foreign exchange resources of the country and the

proper utilization thereof in the interests of the economic development of the country.

This Act may be called the Foreign Exchange Regulation Act; 1973. It extends to the whole ofIndia. It applies also to all citizens of India outside India and to branches and agencies outside

India of companies or bodies corporate, registered or incorporated in India.

Coca-Cola was India's leading soft drink until 1977 when it left India after a new governmentordered the company to turn over its secret formula for Coca-Cola and dilute its stake in its Indianunit as required by the Foreign Exchange Regulation Act (FERA). In 1993, the company (alongwith PepsiCo) returned after the introduction of India's Liberalization policy.

FERA was repealed in 1998 by the government ofAtal Bihari Vajpayeeand replaced bytheForeign Exchange Management Act,which liberalisedforeign exchange controls andrestrictions on foreign investment.

FERA:

Regulated in India by the Foreign Exchange Regulation Act (FERA), 1973. Consisted of 81 sections. FERA Emphasized strict exchange control. Control everything that was specified, relating to foreign exchange. Law violators were treated as criminal offenders. Aimed at minimizing dealings in foreign exchange and foreign securities.
http://en.wikipedia.org/wiki/Indian_Parliamenthttp://en.wikipedia.org/wiki/Indian_Parliamenthttp://en.wikipedia.org/wiki/Indira_Gandhihttp://en.wikipedia.org/wiki/Atal_Bihari_Vajpayeehttp://en.wikipedia.org/wiki/Atal_Bihari_Vajpayeehttp://en.wikipedia.org/wiki/Atal_Bihari_Vajpayeehttp://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttp://en.wikipedia.org/wiki/Foreign_exchange_controlshttp://en.wikipedia.org/wiki/Foreign_exchange_controlshttp://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttp://en.wikipedia.org/wiki/Atal_Bihari_Vajpayeehttp://en.wikipedia.org/wiki/Indira_Gandhihttp://en.wikipedia.org/wiki/Indian_Parliamenthttp://en.wikipedia.org/wiki/Indian_Parliament


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OBJECTIVES

To regulate certain payments.To regulate dealings in foreign exchange and securities.To regulate transactions, indirectly affecting foreign exchange.To regulate the import and export of currency.To conserve precious foreign exchange.The proper utilization of foreign exchange so as to promote the economic development of the

country.

To regulate employment of foreign nationals.To regulate foreign companies.

FEATURES

RBI can authorize a person / company to deal in foreign exchange. RBI can authorize the dealers to do transact the Foreign Currencies, subject to review and RBI was

given power to revoke the authorization in case of non- compliancy

RBI would authorize the persons as Money Changers who will convert the currency of one nationto currency of their nation at rates "Determined by RBI"

NO person, other than "authorized dealer" would enter in any transaction of the foreign currency. For whatever purpose Foreign exchange was required, it was to be used only for that purpose. If he

feels that he cannot use the currency of that particular purpose, he would sell it to a authorizeddealer within 30 days.

No person in India, without "permission from RBI" shall make payments to a person residentoutside India and receive any payment from a person from outside India.

No person shall draw issue or negotiate any bill of exchange in which a right to receive paymentoutside India is created.

No person shall make any credit in an account of a person resident out of India. No person except authorized by RBI shall send foreign currency out of India. A person who has right to receive the foreign exchange would have not to delay the receipt of the

foreign exchange.

PENALTIES

One of the main reasons to fear FERA was, the unbridled power the enforcement authorities had,to arrest any person almost at their whim and fancy. Under Sec. 35 of FERA, any officerauthorised by the Central government can arrest any person on mere suspicion of his havingcommitted an offence under the Act. This is one of the most obnoxious and most misused

provisions of FERA. Any offence under FERA, was a criminal offence, punishable withimprisonment as per code of criminal procedure, 1973.The monetary penalty payable under FERA,

was nearly the five times the amount involved.


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CASE STUDY:- ITC

ABSTRACT:

The case examines the charges of FERA violations against tobacco major ITC in the 1990s. Thecase details the dubious international trading deals by ITC and its partners, the Chitalias, theEnforcement Directorate's investigations and the arrests of ITC executives. The case also looks atcharges of excise duty evasion and share price manipulation against ITC.

The case ends with a discussion on the measures taken by the company to restore its corporateimage in the light of various charges.

BACKGROUND:

ITC was started by UK-based tobacco major BAT (British American Tobacco). It was called thePeninsular Tobacco Company, for cigarette manufacturing, tobacco procurement and processingactivities. In 1910, it set up a full-fledged sales organization named the Imperial TobaccoCompany of India Limited. To cope with the growing demand, BAT set up another cigarettemanufacturing unit in Bangalore in 1912. To handle the raw material (tobacco leaf) requirements,a new company called Indian Leaf Tobacco Company (ILTC) was incorporated in July 1912. By1919, BAT had transferred its holdings in Peninsular and ILTC to Imperial. Following this,Imperial replaced Peninsular as BAT's main subsidiary in India.

By the late 1960s, the Indian government began putting pressure on multinational companies toreduce their holdings. Imperial divested its equity in 1969 through a public offer, which raised the

shareholdings of Indian individual and institutional investors from 6.6% to 26%. After this, theholdings of Indian financial institutions were 38% and the foreign collaborator held 36%. ThoughImperial clearly dominated the cigarette business, it soon realized that making only a single

product, especially one that was considered injurious to health, could become a problem. Inaddition, regular increases in excise duty on cigarettes started having a negative impact on thecompany's profitability. To reduce its dependence on the cigarette and tobacco business, Imperialdecided to diversify into new businesses. It set up a marine products export division in 1971. Thecompany's name was changed to ITC Ltd. in 1974. In the same year, ITC reorganized itself andemerged as a new organization divided along product lines. In 1975, ITC set up its first hotel inChennai. The same year, ITC set up Bhadrachalam Paperboards. In 1981, ITC diversified into thecement business and bought a 33% stake in India Cements from IDBI. This investment howeverdid not generate the synergies that ITC had hoped for and two years later the company divested itsstake. In 1986, ITC established ITC Hotels, to which its three hotels were sold. It also entered thefinancial services business by setting up its subsidiary, ITC Classic

In 1994, ITC commissioned consultants McKinsey & Co. to study the businesses of the companyand make suitable recommendations. McKinsey advised ITC to concentrate on its core strengthsand withdraw from agri-business where it was incurring losses. During the late 1990s, ITC decidedto retain its interests in tobacco, hospitality and paper and either sold off or gave up the controllingstake in several non-core businesses. ITC divested its 51% stake in ITC Agrotech to ConAgra ofthe US. Tribeni Tissues (which manufactured newsprint, bond paper, carbon and thermal paper)was merged with ITC.


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By 2001, ITC had emerged as the undisputed leader, with over 70% share in the Indian cigarettemarket. ITC popular cigarette brands included Gold Flake, Scissors, Wills, India Kings andClassic

VIOLATIONS:

The ED found out that around $ 83 million was transferred into India as per ITCs instructions onthe basis of the accounts maintained by the Chitalia group of companies. According to the EDofficials, the ITC management gave daily instructions to manipulate the invoices related to exportsin order to post artificial profits in its books. A sum of $ 6.5 million was transferred from ITCGlobal to the Chitalias companies and the same was remitted to ITC at a later date. Anotherinstance cited of money laundering by ITC was regarding the over-invoicing of machineryimported by ITC Bhadrachalam Paperboards Ltd., from Italy. The difference in amount wasretained abroad and then passed to the Chitalias, which was eventually remitted to ITC.

The ED issued charge sheets to a few top executives of ITC and raided on nearly 40 ITC officesincluding the premises of its top executives in Kolkata, Delhi, Hyderabad, Guntur, Chennai andMumbai. The charge sheets accused ITC and its functionaries of FERA violations that includedover-invoicing and providing cash to the Chitalias for acquiring and retaining funds abroad, for

bringing funds into India in a manner not conforming to the prescribed norms, for not realizingoutstanding export proceeds and for acknowledging debt abroad TABLE II

Overview of FERA Violations by ITC:

ILTD transferred $4 million to a Swiss bank account. The amount was later transferred to LokmanEstablishment, which in turn transferred the amount to a Chitalia company in the US. ITC also made payments to non-resident shareholders in the case of certain settlements without the

permission of the RBI. This was against Sections 8(1) and 9(1)(a) of FERA;

ITC under-invoiced exports to the tune of $1.35 million, thereby violating the provisions ofSections 16(1)(b) and 18(2);

ITC transferred funds in an unauthorized manner, to the tune of $0.5 million outside India bysuppressing facts with regard to a tobacco deal. This was in contravention of Section a (1) readwith Section 48;

ITC acquired $0.2 million through counter trade premium amounting to between 3 and 4 per centon a total business of 1.30 billion, contravening Section 8(1);

The company had debts to the tune of 25 million due to over-invoicing in coffee and cashewexports during 1992- 93 to the Chitalias, contravening Section 9(1)(c) read with Section 26(6).


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OUTCOME:

Alarmed by the growing criticism of its corporate governance practices and the legal problems,ITC took some drastic steps in its board meeting held on November 15, 1996. ITC inducted threeindependent, non-executive directors on the Board and repealed the executive powers of Saurabh

Misra, ITC deputy chairman, Feroze Vevaina, finance chief and R.K. Kutty, director. ITC alsosuspended the powers of the Committee of Directors and appointed an interim managementcommittee. This committee was headed by the Chairman and included chief executives of the main

businesses to run the day-to-day affairs of the company until the company had a new corporategovernance structure in place.

ITC also appointed a chief vigilance officer (CVO) for the ITC group, who reported independentlyto the board. ITC restructured its management and corporate governance practices in early 1997.The new management structure comprised three tiers- the Board of Directors (BOD), the CoreManagement Committee (CMC) and the Divisional Management Committee (DMC), which wereresponsible for strategic supervision, strategic management, and executive management in the

company respectively.

Through this three-tiered interlinked governance process, ITC claimed to have struck a balancebetween the need for operational freedom, supervision, control and checks and balances. Eachexecutive director was responsible for a group of businesses/corporate functions, apart fromstrategic management and overall supervision of the company

However, the companys troubles seemed to be far from over. In June 1997, the ED issued showcause notices to all the persons who served on ITCs board during 1991-1994 in connection withalleged FERA violations. The ED also issued notices to the FIs and BAT nominees on the ITC

board charging them with FERA contravention. In September 1997, the ED issued a second set ofshow-cause notices to the company, which did not name the nominees of BAT and FIs. Thesenotices were related to the Bukhara restaurant deal and the irregularities in ITCs deals with ITCGlobal.

In late 1997, a US court dismissed a large part of the claim, amounting to $ 41 million, sought bythe Chitalias from ITC and ordered the Chitalias to pay back the $ 12.19 million claimed by ITC.The Chitalias contested the decision in a higher court, the New Jersey District court, which in July1998 endorsed the lower courts order of awarding $ 12.19 million claim to ITC. It also dismissedthe claim for $ 14 million made by the Chitalias against ITC. The judgment was in favor of ITC asthe US courts felt that the Chitalias acted in bad faith in course of the legal proceedings, meddledwith the factual evidence, abused information sources and concealed crucial documents from ITC.Following the court judgment, the Chitalias filed for bankruptcy petitions before the BankruptcyCourt in Florida, which was contested by ITC.

In early 2001, the Chitalias proposed a settlement, which ITC accepted. Following the agreement,the Chitalias agreed to the judgement of the Bankruptcy Court, which disallowed their BankruptcyPetitions. As a part of this settlement ITC also withdrew its objections to few of the claims ofChitalias, for exemption of their assets. However, ITCs efforts to recover its dues against theChitalias continued even in early 2002. The company and its directors inspected documentsrelating to the notices, with the permission of the ED, to frame appropriate replies to the notices. Itwas reported that ITC extended complete cooperation to the ED in its investigations.


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However, the ED issued yet another show-cause notice (the 22 notice so far) to ITC in June 2001,for violating section 16 of FERA, in relation to ITCs offer to pay $ 26 million to settle ITCGlobals debts (under section 16 of FERA, a company should take prior permission from the RBI,

before it can forgo any amount payable to it in foreign exchange). ITC replied to the showcasenotice in July 2001, stating it did not accept any legal liabilities while offering financial support to

ITC Global. On account of the provisions for appeals and counter-appeals, these cases stoodunresolved even in early 2002. However, ITC had created a 1.9 million contingency fund forfuture liabilities.

Although the company went through a tough phase during the late 1990s, it succeeded in retainingits leadership position in its core businesses through value additions to products and services andthrough attaining international competitiveness in quality and cost standards. Despite varioushurdles, the company was a financial success, which analysts mainly attributed to the reformedcorporate governance practices. What remains to be seen is whether the company would be able tocome out unscathed from the various charges of unethical practices against it.


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COCA-COLA

When the FERA came into force on the January 1, 1974, the Government and the Reserve Bank ofIndia were vested with powers to regulate foreign equity in companies operating in India.Companies in low-priority areas such as consumer goods could continue with 40 per cent equity.Coca-Cola came under this category.

Dilution was brought about through divestitures, new issues or a mixture of both. More than athousand companies complied with the FERA. Dilution under FERA triggered the stock market

boom of the 1970s.

Coca-Cola Corporation was operating as a branch since the early 1950s. PepsiCo was alsooperating in the country from around the same time, but decided to vacate India in the late 1950s,

perhaps due to a cartel arrangement with Coca-Cola. With PepsiCo's exit, Coca-Cola haddominance in the Indian market. Its distributive network expanded with a large number of bottlers

and franchisees. It is significant that in India, unlike in some other countries including China,Coca-Cola had to face stiff competition from local bottlers of aerated drinks. There were severalregional brands, but the foremost was Parle, which had a good presence in the western andnorthern regions. Parle was able to lobby with the Government and Parliament to check theexpansion of Coca-Cola. It brought to notice several irregularities committed by its rival. In one ofits representations, Parle could muster the signatures of one hundred MPs. Though Coca-Cola wasin operation since the early 1950s, it was seen that for over two decades it had not declared any

profits from its branch in India. As one PAC Report revealed, the company sent annually largeremittances to headquarters as share of administrative charges though the branch itself was makinglosses. Moreover, these remittances were tax deductible! It was also noted that the concentrate hadto be imported from Atlanta. The price charged to the Indian unit bore no relationship to the cost of

production or the prices charged to other affiliates. The company was obliged to earn import ofconcentrate through its exports. As Coca-Cola had no products of its own for export, it liftedtraditional items such as cashew from third parties and obtained import entitlements in violation ofimport regulations. To all these squabbles was added a new row over equity.

Coca-Cola was directed to continue its operations on condition that its branch would be convertedinto an Indian company with 40 per cent foreign equity. It had to put through dilution within twoyears. The company, apparently, accepted the FERA directive and submitted a scheme. On closerexamination, it was clear that its scheme was a clever ploy.

It had two parts. The first dealt with bottling and distribution. Coca-Cola was willing to hold 40

per cent equity in this unit. The second, more important, was the "technical" or "administrativeunit.'' The company wanted to hold 100 per cent control over this unit and was unwilling to permitany local participation. As FERA required that the entire operations of a branch be brought underone company with 40 per cent foreign equity, the company was advised that its scheme wasunacceptable. It was advised to submit a scheme conforming to the FERA guidelines.

Instead of complying with FERA, Coca-Cola decided to wind up its operations in India. Thoughthe decision flowed from its corporate policies, the company made wild allegations that it decidedto exit as Indian authorities wanted full disclosure of the formula for making concentrate!


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ANDHRA EXCISE MINISTER GETS 2-MONTH JAIL FOR

FERA VIOLATION

ABSTRACT:An economic offences court in Hyderabad sentenced Andhra Pradesh excise and secondaryeducation minister K Parthasarathy to two months' simple imprisonment and imposed a fine of Rs10,000 on him apart from slapping a penalty of Rs 5 lakh on his firm KPR Tele Products forconducting certain monetary transactions in 1997 that went against the provisions of the ForeignExchange Regulation Act (FERA).

VIOLATION OF FERA:

The case against Parthasarathy was that he had sent Rs 50 lakh to a Swiss firm for importingcertain technology and equipment worth Rs 2.5 crore in 1997. Since the machinery never came tohim, the Enforcement Directorate in Bangalore booked a case against him and his firm underFERA provisions. The way the money was sent out of Indian shores was seen as contrary to the

provisions of FERA, later replaced by FEMA. In 2001, the ED imposed a penalty of Rs 3 lakh onParthasarathy's firm but he failed to pay the same. This failure to pay the penalty resulted inanother case.


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ECONOMIC CONDITION OF INDIA IN 1991

In 1985, India had started having balance of payments problems. By the end of 1990, it was in a

serious economic crisis. The government was close to default, its central bank had refused newcredit and foreign exchange reserves had been reduced to such a point that India could barelyfinance three weeks worth of imports. The country had to airlift its gold reserves as a pledge withthe International Monetary Fund (IMF) for a loan.

While India has not been a frequent user of IMF resources, IMF credit has been instrumental inhelping India respond to emerging balance of payments problems on two occasions. In 1981-82,India borrowed SDR 3.9 billion under an Extended Fund Facility, the largest arrangement in IMFhistory at the time. In 1991-93, India borrowed a total of SDR 2.2 billion under two stand byarrangements, and in 1991 it borrowed SDR 1.4 billion under the Compensatory FinancingFacility.

The crisis was caused by currency overvaluation; the current account deficit, and investorconfidence played significant role in the sharp exchange rate depreciation.

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s.During the mid-eighties, India started having balance of payments problems. Precipitated by theGulf War, Indias oil import bill swelled, exports slumped, credit dried up, and investors took theirmoney out. Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating inan external payments crisis. By the end of 1990, India was in serious economic trouble.

The gross fiscal deficit of the government (centre and states) rose from 9.0 percent of GDP in1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the centre alone, the gross

fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4 percentin 1990-91. Since these deficits had to be met by borrowings, the internal debt of the governmentaccumulated rapidly, rising from 35 percent of GDP at the end of 1980-81 to 53 percent of GDP atthe end of 1990-91. The foreign exchange reserves had dried up to the point that India could barelyfinance three weeks worth of imports.

In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with aslide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve Bankof India took partial action, defending the currency by expending international reserves andslowing the decline in value. However, in mid-1991, with foreign reserves nearly depleted, theIndian government permitted a sharp depreciation that took place in two steps within three days (1

July and 3 July 1991) against major currencies.

During the closing decade of the last century India adopted the new economic policy. Theeconomy was opened and the government was liberalizing many of the earlier regulations. Thismade FERA redundant and amendments were needed to the existing law to make it moreappropriate for the new age.


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FOREIGN EXCHANGE MANAGEMENT ACT1999

FEMA, 1999 is an act to consolidate and amend the law relating to foreign exchange with the

objective of facilitating external trade and payments for promoting the orderly development andmaintenance of foreign exchange market in India.

It extends to the whole of India. It shall also apply to all branches, offices and agencies outside India owned or controlled by a

person resident in India and also to any contravention there under committed outside India by anyperson to whom this Act applies.

It came into effect on 1stJune 2000.

OBJECTIVES:

The objective of the Act is to consolidate and amend the law relating to foreign exchange with theobjective of facilitating external trade and payments and for promoting the orderly developmentand maintenance of foreign exchange market in India. FEMA extends to the whole of India. Itapplies to all branches, offices and agencies outside India owned or controlled by a person who is aresident of India and also to any contravention there under committed outside India by any personto whom this Act applies.

RBI PERMISSIONS AND REGULATION:

Except with the general or special permission of the Reserve Bank of India, no person can :-

Deal in or transfer any foreign exchange or foreign security to any person not being an authorizedperson;

Make any payment to or for the credit of any person resident outside India in any manner; Receive otherwise through an authorized person, any payment by order or on behalf of any person

resident outside India in any manner;

Reasonable restrictions for current account transactions as may be prescribed. Any person may sell or draw foreign exchange to or from an authorized person for a capital

account transaction. The Reserve Bank may, in consultation with the Central Government,specify:-

Any class or classes of capital account transactions which are permissible; The limit up to which foreign exchange shall be admissible for such transactions

However, the Reserve Bank cannot impose any restriction on the drawing of foreign exchange forpayments due on account of amortization of loans or for depreciation of direct investments in theordinary course of business.


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The Reserve Bank can, by regulations, prohibit, restrict or regulate the following:-

Transfer or issue of any foreign security by a person resident in India; Transfer or issue of any security by a person resident outside India; Transfer or issue of any security or foreign security by any branch, office or agency in India of a

person resident outside India; Any borrowing or lending in foreign exchange in whatever form or by whatever name called; Any borrowing or tending in rupees in whatever form or by whatever name called between a

person resident in India and a person resident outside India;

Deposits between persons resident in India and persons resident outside India; Export, import or holding of currency or currency notes; Transfer of immovable property outside India, other than a lease not exceeding five years, by a

person resident in India;

Acquisition or transfer of immovable property in India, other than a lease not exceeding five years,by a person resident outside India;

Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred:-1. By a person resident in India and owed to a person resident outside India or2. By a person resident outside India.


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PROVISIONS:

Section 2 -The Act here provides clarity on several definitions and terms used in the context of

foreign exchange.

Some of the key terms and definitions under this act are:

1. Authorized Person - "Authorized person" means an authorized dealer, moneychanger, offshorebanking unit or any other person for the time being authorized under section 10(1) to deal inforeign exchange securities.

2. Capital Account Transaction - "Capital account transaction" means a transaction which alters theassets or liabilities, including contingent liabilities, outside India of persons resident in India orassets or liabilities in India of person resident outside India, and includes transactions referred to in

sub-section (3) of section 6

3. Current Account Transaction - "Current account transaction" means a transaction other than acapital account transaction and without prejudice to the generality of the foregoing suchtransaction includes,-

i. Payments due in connection with foreign trade, other current business, services, and short-termbanking and credit facilities in the ordinary course of business.

ii. Payments due as interest on loans and as net income from investments.iii. Remittances for living expenses of parents, spouse and children residing abroad, andiv. Expenses in connection with foreign travel, education and medical care of parents, spouse and

children;

4. Foreign exchange reserves- A country's reserves of foreign currencies. Commonly known as"quick cash", they can be used immediately to finance imports and other foreign payables.

5. Foreign security -means any security, in the form of shares, stocks, bonds, debentures or anyother instrument denominated or expressed in foreign currency and includes securities expressed inforeign currency, but where redemption or any form of return such as interest or dividends is

payable in Indian currency.

6. Foreign exchange- means foreign currency and includes,-a.

deposits, credits and balances payable in any foreign currency,b. drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indiancurrency but payable in any foreign currency,

c. drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions orpersons outside India, but payable in Indian currency;

7. Authorized dealer - "authorized dealer" means a person for the time being authorized undersection 6 to deal in foreign exchange;

8. Currency [including relevant notification]"Currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts,

travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or suchother similar instruments, as may be notified by the Reserve Bank;


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Section 3(Dealing in foreign exchange)prohibits dealings in foreign exchange except throughan authorised person. Similarly, without the prior approval of the RBI, no person can make any

payment to any person resident outside India in any manner other than that prescribed by it. TheAct restricts non-authorised persons from entering into any financial transaction in India asconsideration for or in association with acquisition or creation or transfer of a right to acquire any

asset outside India.

Section 4(Holding of foreign exchange)restrains any person resident in India from acquiring,holding, owning, possessing or transferring any foreign exchange, foreign security or anyimmovable property situated outside India except as specifically provided in the Act.

Section 5(Current account transactions)states that any person can sell or draw foreignexchange to or from authorized persons if such sale or withdrawal is a current account transaction.Reasonable restrictions on current account transaction can be imposed by the Central governmentin public interest, in consultation with the RBI.

Section 6(capital account transactions)this section allows a person to draw or sell foreignexchange from or to an authorised person for a capital account transaction. RBI in consultationwith the Central Government has issued various regulations on capital account transactions interms of sub-sect ion (2) and (3) of section 6.

The duties and liabilities of the Authorised Dealers have been dealt with in Sections 10, 11 and

12, whileSections 13 to 15 cover penalties and enforcement of the orders of the AdjudicatingAuthority as well as the power to compound contraventions under the Act.


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CONTRAVENTIONS AND PENALTIES

DIRECTORATE OF ENFORCEMENT:

The Directorate of Enforcement has been formed to ensure that the provisions of the Act areadhered to. In the Directorate of Enforcement, an Additional Director, a special Director andAssistant Directors of Enforcement are appointed by the Central govt. under section 36.

PENALTIES UNDER THE ACT:

An Adjudicating Authority appointed by the Central Government under FEMA can imposepenalties for violating any provision of the Act or contravention of any rule, regulation, directionor order issued under the power conferred by the Act.

If any person contravenes any provision of this Act, or contravenes any rule, regulation,notification, direction or order issued in exercise of the powers under this Act, or contravenes anycondition subject to which an authorization is issued by the Reserve Bank, he shall, uponadjudication, be liable to a penalty up to thrice the sum involved in such contravention where suchamount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and wheresuch contravention is a continuing one, further penalty which may extend to five thousand rupeesfor every day after the first day during which the contravention continues.

Any Adjudicating Authority adjudging any contravention may, if he thinks fit in addition to anypenalty which he may impose for such contravention direct that any currency, security or any othermoney or property in respect of which the contravention has taken place shall be confiscated to theCentral Government and further direct that the foreign exchange holdings, if any, of the personscommitting the contraventions or any part thereof, shall be brought back into India or shall beretained outside India in accordance with the directions made in this behalf.


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FOREIGN DIRECT INVESTMENT IN INDIA

Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is

formulated and announced by the Government of India. The Department of Industrial Policy andPromotion, Ministry of Commerce and Industry, Government of India issues a Consolidated FDIPolicy Circular on an yearly basis on March 31 of each year (since 2010) elaborating the policyand the process in respect of FDI in India. The latest Consolidated FDI Policy Circular isgoverned by the provisions of the Foreign Exchange Management Act (FEMA), 1999. FEMARegulations which prescribe amongst other things the mode of investments i.e. issue or acquisitionof shares / convertible debentures and preference shares, manner of receipt of funds, pricingguidelines and reporting of the investments to the Reserve Bank. The Reserve Bank has issued

Notification No. FEMA 20 /2000-RB dated May 3, 2000 which contains the Regulations in thisregard. This Notification has been amended from time to time.


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ENTRY ROUTES FOR INVESTMENTS

Under the Foreign Direct Investments (FDI) Scheme, investments can be made in shares,

mandatorily and fully convertible debentures and mandatorily and fully convertible preferenceshares of an Indian company by non-residents through two routes:

1. Automatic Route: Under the Automatic Route, the foreign investor or the Indian company doesnot require any approval from the Reserve Bank or Government of India for the investment.

2. Government Permission Route: Under the Government Route, the foreign investor or the Indiancompany should obtain prior approval of the Government of India(Foreign Investment PromotionBoard (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department ofIndustrial Policy & Promotion, as the case may be) for the investment.

ELIGIBILITY FOR INVESTMENT

1. A person resident outside India or an entity incorporated outside India, can invest in India, subjectto the FDI Policy of the Government of India. A person who is a citizen of Bangladesh or an entityincorporated in Bangladesh can invest in India under the FDI Scheme, with the prior approval ofthe FIPB. Further, a person who is a citizen of Pakistan or an entity incorporated in Pakistan, may,with the prior approval of the FIPB, can invest in an Indian company under FDI Scheme, subject to

the prohibitions applicable to all foreign investors and the Indian company, receiving such foreigndirect investment, should not be engaged in sectors / activities pertaining to defence, space andatomic energy.

2. NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to investin shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis,subject to the condition that the amount of consideration for such investment shall be paid only byway of inward remittance in free foreign exchange through normal banking channels.

3. Overseas Corporate Bodies (OCBs) have been de-recognised as a class of investors in India witheffect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not

under adverse notice of the Reserve Bank can make fresh investments under the FDI Scheme asincorporated non-resident entities, with the prior approval of the Government of India, if theinvestment is through the Government Route; and with the prior approval of the Reserve Bank, ifthe investment is through the Automatic Route. However, before making any fresh FDI under theFDI scheme, an erstwhile OCB should through their AD bank, take a onetime certification fromRBI that it is not in the adverse list being maintained with the Reserve Bank of India.


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TYPE OF INSTRUMENTS

1. Indian companies can issue equity shares, fully and mandatorily convertible debentures and fullyand mandatorily convertible preference shares subject to the pricing guidelines / valuation normsand reporting requirements amongst other requirements as prescribed under FEMA Regulations.

2. Issue of other types of preference shares such as non-convertible, optionally convertible orpartially convertible, has to be in accordance with the guidelines applicable for ExternalCommercial Borrowings (ECBs).

3. As far as debentures are concerned, only those which are fully and mandatorily convertible intoequity, within a specified time, would be reckoned as part of equity under the FDI Policy.

PRICING GUIDELINES

1. Fresh issue of shares: Price of fresh shares issued to persons resident outside India under theFDI Scheme, shall be:

a) On the basis of SEBI guidelines in case of listed companies.

b) Not less than fair value of shares determined by a SEBI registered Merchant Banker or aChartered Accountant as per the Discounted Free Cash Flow Method (DCF) in case of unlistedcompanies.

2. The above pricing guidelines are also applicable for issue of shares against payment of lump

sum technical knowhow fee / royalty due for payment/repayment or conversion of ECB into equityor capitalization of pre incorporation expenses/import payables (with prior approval ofGovernment).

3. However, where non-residents (including NRIs) are making investments in an Indian companyin compliance with the provisions of the Companies Act, 1956, by way of subscription to itsMemorandum of Association, such investments may be made at face value subject to theireligibility to invest under the FDI scheme.

4. Preferential allotment: In case of issue of shares on preferential allotment, the issue price shallnot be less that the price as applicable to transfer of shares from resident to non-resident.

5. Issue of shares by SEZs against import of capital goods: In this case, the share valuation hasto be done by a Committee consisting of Development Commissioner and the appropriate Customsofficials.

6. Right Shares: The price of shares offered on rights basis by the Indian company to non-residentshareholders shall be:

a) In the case of shares of a company listed on a recognised stock exchange in India, at a price asdetermined by the company.

b) In the case of shares of a company not listed on a recognised stock exchange in India, at aprice which is not less than the price at which the offer on right basis is made to the residentshareholders.


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7. Acquisition / transfer of existing shares (private arrangement):The acquisition of existingshares from Resident to Non-resident (i.e. to incorporated non-resident entity other than erstwhileOCB, foreign national, NRI, FII) would be at a:

a) Negotiated price for shares of companies listed on a recognized stock exchange in India which

shall not be less than the price at which the preferential allotment of shares can be made underthe SEBI guidelines, as applicable, provided the same is determined for such duration asspecified therein, preceding the relevant date, which shall be the date of purchase or sale ofshares. The price per share arrived at should be certified by a SEBI registered Merchant Bankeror a Chartered Accountant.

b) Negotiated price for shares of companies which are not listed on a recognized stock exchangein India which shall not be less than the fair value to be determined by a SEBI registeredMerchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow (DCF)method.

8. Further, transfer of existing shares by Non-resident (i.e. by incorporated non-resident entity,erstwhile OCB, foreign national, NRI, FII) to Resident shall not be more than the minimum priceat which the transfer of shares can be made from a resident to a non-resident as given above.

9. The pricing of shares / convertible debentures / preference shares should be decided /determined upfront at the time of issue of the instruments. The price for the convertibleinstruments can also be a determined based on the conversion formula which has to be determined/ fixed upfront, however the price at the time of conversion should not be less than the fair value

worked out, at the time of issuance of these instruments, in accordance with the extant FEMAregulations.


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WAL-MART RESUMES US LOBBYING ON FDI IN

INDIA

WASHINGTON/NEW DELHI: Global retail giant Wal-Mart has resumed its lobbying with the

US lawmakers on matters related to FDI in India and it spent $1.5 million on about 50 specific

issues, including those related to Indian market during the last quarter.

"Discussions regarding foreign direct investment in India" is one of the ten-odd specific issues in

the area of trade that were carried out by registered lobbyists on behalf of Wal-Mart during thirdquarter of 2013, according to its latest Lobbying Disclosure Form submitted to the US Senate.

Overall, Wal-Mart lobbyists discussed nearly 50 'specific issues' with the US lawmakers during

the quarter, resulting into total expenses of $1.5 million relating to lobbying activities for the

reporting period, shows the 19-page disclosure report.

Wal-Mart's lobbying activities covered the Senate, House of Representatives, department of

state, US trade representatives, US Agency for International Development and the department of

labour, among others.

As per Congressional records, Wal-Mart had halted its lobbying with the US lawmakers and

federal agencies on India-specific issues in the preceding quarter, after seeking their support for

about five years to facilitate its entry into the high-growth Indian retail market.

However, such lobbying activities resumed during the last quartera period which also saw

hectic parleys in India with regard to Wal-Mart's business activities in the country.

After months of discussions, Wal-Mart earlier this month announced buyout of Bharti group's 50

per cent stake in their wholesale retail business in India.
http://timesofindia.indiatimes.com/photo/24775860.cmshttp://timesofindia.indiatimes.com/photo/24775860.cmshttp://timesofindia.indiatimes.com/photo/24775860.cmshttp://timesofindia.indiatimes.com/photo/24775860.cms


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Wal-Mart has also been requesting the Indian government to further relax norms for FDI in

multi-brand retail business, where 51 per cent foreign equity was allowed last year despite

opposition by various political parties.

Incidentally, a probe report on Wal-Mart's lobbying for entering India may soon be discussed by

the Union Cabinet. The probe is said to have remained inconclusive as Wal-Mart and others didnot provide required information.

The Indian government had ordered the probe on Wal-Mart's lobbying late last year after a huge

political outcry over the American retail giant having spent millions of dollars on its lobbying

activities in the US for years on various issues, including on access to the Indian market and the

relevant FDI norms.

Lobbying is legally permitted in the US, but the companies and their registered lobbyists are

required to make detailed disclosures about their activities every quarter.

Wal-Mart, on its part, has been maintaining that it has disclosed all its lobbying activities as per

the US rules and it did not violate any Indian regulations in this regard.

There are no clear regulations on lobbying in India, although companies here also indulge in

activities promoting their cause with the government and other agencies, either directly or

through industry bodies and other groups.

As per the Congressional records, Wal-Mart began lobbying in the US on India-specific issues

way back in 2008. Since then, the company has spent a total amount of $39.42 million (about Rs

242 crore) on numerous lobbying issues, including those related to India.

Out of this, over $5 million have been spent so far in 2013. Wal-Mart's lobbying issues did not

include India in the second quarter of this year, while the first quarter of 2012, as also all four

quarters of 2009 also did not have any single lobbying issue related to India.

Wal-Mart and many other overseas supermarket chains have been wanting to set shop for many

years in India, which opened up this business for foreign players only last year.

Still, there are many restrictions, such as those on sourcing of products, that are keeping foreign

multi-brand retailers away from the country.

Separately, Wal-Mart was also facing a probe by the enforcement directorate in Delhi for alleged

violation of FEMA (Foreign Exchange Management Act) norms, but is said to have been given

clean chit on that front.


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FOREIGN INVESTMENT LIMITS, PROHIBITED

SECTORS AND INVESTMENT IN MSES

A)FOREIGN INVESTMENT LIMITS

The details of the entry route applicable and the maximum permissible foreign investment /sectoral cap in an Indian Company are determined by the sector in which it is operating.

B) INVESTMENTS IN MICRO AND SMALL ENTERPRISE (MSE)

A company which is reckoned as Micro and Small Enterprise (MSE) (earlier Small ScaleIndustrial Unit) in terms of the Micro, Small and Medium Enterprises Development (MSMED)Act, 2006, including an Export Oriented Unit or a Unit in Free Trade Zone or in Export Processing

Zone or in a Software Technology Park or in an Electronic Hardware Technology Park, and whichis not engaged in any activity/sector may issue shares or convertible debentures to a personresident outside India (other than a resident of Pakistan and to a resident of Bangladesh underapproval route), subject to the prescribed limits as per FDI Policy, in accordance with the EntryRoutes and the provision of Foreign Direct Investment Policy, as notified by the Ministry ofCommerce & Industry, Government of India, from time to time.Any Industrial undertaking, with or without FDI, which is not an MSE, having an industrial licenseunder the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturingitems reserved for the MSE sector may issue shares to persons resident outside India (other than aresident/entity of Pakistan and to a resident/entity of Bangladesh with prior approval FIPB), to theextent of 24 per cent of its paid-up capital or sectoral cap whichever is lower. Issue of shares in

excess of 24 per cent of paid-up capital shall require prior approval of the FIPB of the Governmentof India and shall be in compliance with the terms and conditions of such approval.

C) PROHIBITION ON FOREIGN INVESTMENT IN INDIA

1. Foreign investment in any form is prohibited in a company or a partnership firm or a proprietaryconcern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposesto engage in the following activities3:

(a) Business of chit fund, or

(b) Nidhi company, or

(c) Agricultural or plantation activities, or

(d) Real estate business, or construction of farm houses, or

(e) Trading in Transferable Development Rights (TDRs).

2. It is clarified that real estate business means dealing in land and immovable property with a viewto earning profit or earning income there from and does not include development of townships,

construction of residential / commercial premises, roads or bridges, educational institutions,recreational facilities, city and regional level infrastructure, townships.


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3. In addition to the above, Foreign investment in the form of FDI is also prohibited in certain sectorssuch as (Annex-2):

a) Lottery Business including Government /private lottery, online lotteries, etc.

b) Gambling and betting including casinos etc.

c) Business of Chit funds

d) Nidhi company

e) Trading in Transferable Development Rights (TDRs)

f) Real Estate Business or Construction of Farm Houses

g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

h) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway

Transport (other than Mass Rapid Transport Systems).

Note:Foreign technology collaboration in any form including licensing for franchise, trademark,brand name, management contract is also prohibited for Lottery Business and Gambling andBetting activities.


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SECTOR-SPECIFIC POLICY FOR FOREIGN

INVESTMENT

In the following sectors/activities, FDI up to the limit indicated against each sector/activity is

allowed, subject to applicable laws/ regulations; security and other conditionalities. Insectors/activities not listed below, FDI is permitted up to 100% on the automatic route, subject toapplicable laws/ regulations; security and other conditionalities.

Wherever there is a requirement of minimum capitalization, it shall include share premiumreceived along with the face value of the share, only when it is received by the company uponissue of the shares to the non-resident investor. Amount paid by the transferee during post-issuetransfer of shares beyond the issue price of the share, cannot be taken into account whilecalculating minimum capitalization requirement.

1.BANKINGPRIVATE SECTORPercent of Cap/Equity: -74 % including investment by FIIs

Entry Route:-

Automatic upto 49% Government Route beyond 49% and upto 74%

Other conditions:

1. This 74% limit will include investment under the Portfolio Investment Scheme (PIS) by FIIs, NRIsand shares acquired prior to September 16, 2003 by erstwhile OCBs, and continue to include IPOs,Private placements, GDR/ADRs and acquisition of shares from existing shareholders.

2. The aggregate foreign investment in a private bank from all sources will be allowed up to amaximum of 74 per cent of the paid up capital of the Bank. At all times, at least 26 per cent of the

paid up capital will have to be held by residents, except in regard to a wholly-owned subsidiary ofa foreign bank.

3. The stipulations as above will be applicable to all investments in existing private sector banks also.4. The permissible limits under portfolio investment schemes through stock exchanges for FIIs and

NRIs will be as follows:

i. In the case of FIIs, as hitherto, individual FII holding is restricted to 10 per cent of the totalpaid-up capital, aggregate limit for all FIIs cannot exceed 24 per cent of the total paid-upcapital, which can be raised to 49 per cent of the total paid-up capital by the bankconcerned through a resolution by its Board of Directors followed by a special resolution to

that effect by its General Body.


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(a)Thus, the FII investment limit will continue to be within 49 per cent of the total paid-upcapital.

(b)In the case of NRIs, as hitherto, individual holding is restricted to 5 per cent of the totalpaid-up capital both on repatriation and non- repatriation basis and aggregate limit cannot

exceed 10 per cent of the total paid-up capital both on repatriation and non-repatriation basis.However, NRI holding can be allowed up to 24 per cent of the total paid-up capital both onrepatriation and non-repatriation basis provided the banking company passes a specialresolution to that effect in the General Body.

(c) Applications for foreign direct investment in private banks having jointventure/subsidiary in insurance sector may be addressed to the Reserve Bank of India (RBI)for consideration in consultation with the Insurance Regulatory and Development Authority(IRDA) in order to ensure that the 26 per cent limit of foreign shareholding applicable for theinsurance sector is not being breached.

(d) Transfer of shares under FDI from residents to non-residents will continue to requireapproval of RBI and Government as per para 3.6.2 of DIPPs Circular 1 of 2012 asapplicable.

(e) The policies and procedures prescribed from time to time by RBI and other institutionssuch as SEBI, D/o Company Affairs and IRDA on these matters will continue to apply.

(f) RBI guidelines relating to acquisition by purchase or otherwise of shares of a privatebank, if such acquisition results in any person owning or controlling 5 per cent or more of thepaid up capital of the private bank will apply to non-resident investors as well.

ii. Setting up of a subsidiary by foreign banks:(a) Foreign banks will be permitted to either have branches or subsidiaries but not both.

(b) Foreign banks regulated by banking supervisory authority in the home country andmeeting Reserve Banks licensing criteria will be allowed to hold 100 per cent paid upcapital to enable them to set up a wholly-owned subsidiary in India.

(c) A foreign bank may operate in India through only one of the three channels

Branches A wholly-owned subsidiary and A subsidiary with aggregate foreign investment up to a maximum of 74 per

cent in a private bank.

(d) A foreign bank will be permitted to establish a wholly-owned subsidiary either throughconversion of existing branches into a subsidiary or through a fresh banking license. Aforeign bank will be permitted to establish a subsidiary through acquisition of shares of anexisting private sector bank provided at least 26 per cent of the paid capital of the privatesector bank is held by residents at all times consistent with Para (i) (b) above.


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(e) A subsidiary of a foreign bank will be subject to the licensing requirements andconditions broadly consistent with those for new private sector banks.

(f) Guidelines for setting up a wholly-owned subsidiary of a foreign bank will be issuedseparately by RBI

(g) All applications by a foreign bank for setting up a subsidiary or for conversion of theirexisting branches to subsidiary in India will have to be made to the RBI.

iii. At present there is a limit of ten per cent on voting rights in respect of banking companies,and this should be noted by potential investor. Any change in the ceiling can be broughtabout only after final policy decisions and appropriate Parliamentary approvals.

BANKINGPUBLIC SECTORPercent of Cap/Equity: - 20% (FDI and PIS)

Entry Route: - Government

Banking- Public Sector subject to Banking Companies (Acquisition & Transfer of Undertakings)Acts 1970/80. This ceiling (20%) is also applicable to the State Bank of India and its associateBanks.


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MULTI BRAND RETAIL TRADINGPercent of Cap/Equity:- 51%

Entry Route :- Government

Conditions :

FDI in multi brand retail trading, in all products, will be permitted, subject to the followingconditions:

1. Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry,fishery and meat products, may be unbranded.

2. Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100million.

3. At least 50% of total FDI brought in shall be invested in 'backend infrastructure' within threeyears of the first tranche of FDI, where 'back-end infrastructure' will include capitalexpenditure on all activities, excluding that on front-end units; for instance, back-endinfrastructure will include investment made towards processing, manufacturing, distribution,design improvement, quality control, packaging, logistics, storage, ware-house, agriculturemarket produce infrastructure etc. Expenditure on land cost and rentals, if any, will not becounted for purposes of back end infrastructure.

4. At least 30% of the value of procurement of manufactured/ processed products purchasedshall be sourced from Indian 'small industries' which have a total investment in plant &machinery not exceeding US $1.00 million. This valuation refers to the value at the time ofinstallation, without providing for depreciation. Further, if at any point in time, this valuationis exceeded, the industry shall not qualify as a 'small industry' for this purpose. This

procurement requirement would have to be met, in the first instance, as an average of fiveyears' total value of the manufactured/processed products purchased, beginning 1st April ofthe year during which the first tranche of FDI is received. Thereafter, it would have to be meton an annual basis.

5. Self-certification by the company, to ensure compliance of the conditions at serial nos. (ii),(iii) and (iv) above, which could be cross-checked, as and when required. Accordingly, the

investors shall maintain accounts, duly certified by statutory auditors.

6. Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per2011 Census and may also cover an area of 10 kms. around the municipal/urbanagglomeration limits of such cities; retail locations will be restricted to conforming areas as

per the Master/Zonal Plans of the concerned cities and provision will be made for requisitefacilities such as transport connectivity and parking; In States / Union Territories not havingcities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be setup in the cities of their choice, preferably the largest city and may also cover an area of 10kms around the municipal/urban agglomeration limits of such cities. The locations of suchoutlets will be restricted to conforming areas, as per the Master/ Zonal Plans of the concernedcities and provision will be made for requisite facilities such as transport connectivity and

parking.


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INSURANCEPercent of Cap/Equity: - 26%

Entry Route: - Government

Conditions:

1) FDI in the Insurance sector, as prescribed in the Insurance Act, 1938, is allowed under theautomatic route.

2) This will be subject to the condition that Companies bringing in FDI shall obtain necessarylicense from the Insurance Regulatory & Development Authority for undertaking insuranceactivities.

Issues in FDI in Insurance Sector:

1) Efficiency of the companies with FDI

2) Credibility of foreign companies

3) Greater channelization of savings to insurance

4) Flow of funds to infrastructure

Advantages of FDI in insurance sector

1) Capital for expansion

2) Wider Scope for Growth

3) Moving towards Global Practices

4) Provide customers with competitive products, more options and better service levels.


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EXTERNAL COMMERCIAL BORROWINGS

In the Indian Context, an external commercial borrowing (ECB) is an instrument used to

facilitate the access to foreign money by Indian corporations and PSUs. ECBs includecommercial bank loans, buyers' credit, suppliers' credit, securitised instruments suchas floating rate notes and fixed rate bonds etc., credit from official export credit agencies andcommercial borrowings from the private sector window of multilateral financial Institutions suchas International Finance Corporation (Washington), ADB, AFIC, CDC, etc. The DEA(Department of Economic Affairs), Ministry of Finance, Government of India along withReserve Bank of India, monitors and regulates ECB guidelines and policies. ECBs can beaccessed through either Automatic Route or Approval Rate.

Source of funds for corporates from abroad with advantage of:

lower rates of interest prevailing in the international financial markets longer maturity period for financing expansion of existing capacity as well as for fresh investment

Defined as to include commercial loans [in the form of bank loans, buyers credit, supplierscredit, and securitised instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed fromnon-resident lenders with minimum average maturity of 3 years.

I. AUTOMATIC ROUTE

The following aspects are covered by the RBI circular updated in March 2013 as per therequirements of FEMA, 1999.

The following can be considered as eligible borrowers for availing the ECB facility:

1. Corporate registered within the Companies Act,1956 and Infrastructure Finance Companies (IFCs)except financial intermediaries, such as banks, financial institutions (FIs), Housing FinanceCompanies (HFCs) and Non-Banking Financial Companies (NBFCs).

2. Units in SEZs, NGOs, MFIs engaged in Micro financing activities are also eligible to avail theECB facility subject to specified conditions of having satisfactory borrowing relationships with a

scheduled commercial bank authorised to deal in FOREX. There is also a requirement of acertificate of due diligence on fit and proper status of the Board/ Committee of management ofthe borrowing entity from the designated AD bank.

3. SIDBI is also empowered the facility as defined under the MSMED Act, 2006.The below can be addressed as the recognised lenders for availing this facility.

Borrowers mentioned above can raise ECB from internationally recognized sources, such as:

(a) International banks,

(b) International capital markets,


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END USE

a. ECB can be raised for investment such as import of capital goods (as classified by DGFT in theForeign Trade Policy), new projects, modernization/expansion of existing production units in realsector - industrial sector including small and medium enterprises (SME).

b. Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) subject tothe existing guidelines on Indian Direct Investment in JV/ WOS abroad.

c. Utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestmentprocess and also in the mandatory second stage offer to the public under the Governmentsdisinvestment programme of PSU shares.

d. Interest During Construction (IDC) for Indian companies which are in the infrastructure sector,where infrastructure is defined as per the extant ECB guidelines, subject to IDC beingcapitalized and forming part of the project cost

e. For lending to self-help groups or for micro-credit or for bonafide micro finance activity includingcapacity building by NGOs engaged in micro finance activities.

f. Infrastructure Finance Companies (IFCs) i.e. Non-Banking Financial Companies (NBFCs)categorized as IFCs by the Reserve Bank, are permitted to avail of ECBs, including theoutstanding ECBs, up to 75 per cent of their owned funds, for on-lending to the infrastructuresector as defined under the ECB policy

g. Hedging requirement for currency risk should be 75 per cent of the exposure.h. Maintenance and operations of toll systems for roads and highways for capital expenditure

provided they form part of the original project.

i. SIDBI can lend to the borrowers in the MSME sector for permissible end uses, having naturalhedge by way of foreign exchange earnings. SIDBI may on-lend either in INR or in foreigncurrency (FCY). In case of on-lending in INR, the foreign currency risk shall be fully hedged bySIDBI.

j. Refinancing of Bridge Finance (including buyers / suppliers credit) availed of for import ofcapital goods by companies in Infrastructure Sector.

k. Payment for Spectrum Allocation.

GUARANTEES

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks,

Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECBis not permitted.


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SECURITY

The choice of security to be provided to the lender/supplier is left to the borrower. AD Category - Ibanks have been delegated powers to convey no objection under the Foreign Exchange

Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securitiesand issue of corporate or personal guarantees in favour of overseas lender / security trustee, tosecure the ECB to be raised by the borrower.

Once the AD- Category I banks are convinced they may convey their no objection, under FEMA,1999 for creation of charge on immovable assets, financial securities and issue of personal orcorporate guarantee.

PARKING OF ECB PROCEEDS

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India,pending utilization for permissible end-uses. The proceeds of the ECB raised abroad meant forRupee expenditure in India, such as, local sourcing of capital goods, on-lending to Self-HelpGroups or for micro credit, payment for spectrum allocation, etc. should be repatriatedimmediately for credit to the borrowers Rupee accounts with AD Category I banks in India. Inother words, ECB proceeds meant only for foreign currency expenditure can be retained abroad

pending utilization. The rupee funds, however, will not be permitted to be used for investment incapital markets, real estate or for inter-corporate lending.

ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits orCertificate of Deposit or other products offered by banks rated not less than AA (-) by Standardand Poor/Fitch IBCA or Aa3 by Moodys (b) Treasury bills and other monetary instruments of oneyear maturity having minimum rating as indicated above, and (c) deposits with overseas branches /subsidiaries of Indian banks abroad. The funds should be invested in such a way that theinvestments can be liquidated as and when funds are required by the borrower in India.

Any action in contravention to the provisions of this Act shall invite penal action under the FEMA,1999.

PREPAYMENT

Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approvalof Reserve Bank subject to compliance with the stipulated minimum average maturity period asapplicable to the loan.

PROCEDURE

Borrowers may enter into loan agreement complying with the ECB guidelines with recognisedlender for raising ECB under Automatic Route without the prior approval of the Reserve Bank.

The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank of Indiabefore drawing down the ECB.


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II. APPROVAL ROUTE

The following shall be considered as Eligible Borrowers for ECB under the Approval route:

a. On lending by the EXIM Bank for specific purposes will be considered on a case by case basis.b. ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs)

from multilateral financial institutions, reputable regional financial institutions, official exportcredit agencies and international banks to finance import of infrastructure equipment for leasing toinfrastructure projects.

c. Infrastructure Finance Companies (IFCs) i.e. Non-Banking Financial Companies (NBFCs),categorized as IFCs, by the Reserve Bank, are permitted to avail of ECBs, including theoutstanding ECBs, beyond 50 per cent of their owned funds, for on-lending to the infrastructuresector as defined under the ECB policy.

d. Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to financeinfrastructure companies / projects exclusively, will be treated as Financial Institutions and ECB

by such entities will be considered under the Approval Route.

e. Multi-State Co-operative Societies engaged in manufacturing activity and satisfying the followingcriteria i) the Co-operative Society is financially solvent and ii) the Co-operative Society submitsits up-to-date audited balance sheet.

f. SEZ developers can avail of ECBs for providing infrastructure facilities within SEZ, as defined inthe extant ECB policy like (i) power, (ii) telecommunication, (iii) railways, (iv) roads including

bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply,sanitation and sewage projects), (viii) mining, exploration and refining and (ix) cold storage orcold room facility, including for farm level pre-cooling, for preservation or storage of agriculturaland allied produce, marine products and meat.

g. Developers of National Manufacturing Investment Zones (NMIZs) can avail of ECB for providinginfrastructure facilities within SEZ.

h. Eligible borrowers under the automatic route other than corporate in the services sector viz. hotel,hospital and software can avail of ECB beyond USD 750 million or equivalent per financial year.

i. Corporate in the services sector viz. hotels, hospitals and software sector can avail of ECB beyondUSD 200 million or equivalent per financial year.

j. Small Industries Development Bank of India (SIDBI) is eligible to avail of ECB for on-lending toMSME sector, as defined under the Micro, Small and Medium Enterprises Development(MSMED) Act, 2006, beyond 50 per cent of their owned funds, subject to a ceiling of USD 500million per financial year.

k. ECB facility can also be availed for low cost housing project facilities.


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2. Overseas Direct Investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject tothe existing guidelines on Indian Direct Investment in JV/WOS abroad.

3. Interest during Construction (IDC) for Indian companies which are in the infrastructure sector, asdefined under the extant ECB guidelines subject to IDC being capitalized and forming part of the

project cost.

4. The payment by eligible borrowers in the Telecom sector, for spectrum allocation may, initially, bemet out of Rupee resources by the successful bidders, to be refinanced with a long-term ECB,under the approval route, subject to the following conditions:(i) The ECB should be raised within 12 months from the date of payment of the final instalment tothe Government;(ii) The designated AD - Category I bank should monitor the end-use of funds;(iii) Banks in India will not be permitted to provide any form of guarantees; and(iv) All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, averagematurity, etc. should be complied with.

5. The first stage acquisition of shares in the disinvestment process and also in the mandatory secondstage offer to the public under the Governments disinvestment programme of PSU shares.

6. Repayment of Rupee loans availed of from domestic banking system: Indian companies whichare in the infrastructure sector (except companies in the power sector), as defined under the extantECB guidelines , are permitted to utilise 25 per cent of the fresh ECB raised by them towardsrefinancing of the Rupee loan/s availed by them from the domestic banking system, subject to thefollowing conditions:(i) At least 75 per cent of the fresh ECB proposed to be raised should be utilised for capitalexpenditure towards a 'new infrastructure' project(s)(ii) in respect of remaining 25 per cent, the refinance shall only be utilized for repayment of theRupee loan availed of for 'capital expenditure' of earlier completed infrastructure project(s); and(iii) The refinance shall be utilized only for the Rupee loans which are outstanding in the books ofthe financing bank concerned.

Companies in the power sector are permitted to utilize up to 40 per cent of the fresh ECB raised bythem towards refinancing of the Rupee loan/s availed by them from the domestic banking systemsubject to the condition that at least 60 per cent of the fresh ECB proposed to be raised should beutilized for fresh capital expenditure for infrastructure project(s).

7. Bridge Finance: Indian companies which are in the infrastructure sector, as defined under theextant ECB policy are permitted to import capital goods by availing of short term credit (including

buyers / suppliers credit) in the nature of 'bridge finance', with RBIs prior approval provided thebridge finance shall be replaced with a long term ECB as per extant ECB guidelines.

8. ECB for working capital for civil aviation sector: Airline companies registered under theCompanies Act, 1956 and possessing scheduled operator permit license from DGCA for passengertransportation are eligible to avail of ECB for working capital. Such ECBs will be allowed basedon the cash flow, foreign exchange earnings and the capability to service the debt and the ECBscan be raised with a minimum average maturity period of three years.


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The overall ECB ceiling for the entire civil aviation sector would be USD one billion and themaximum permissible ECB that can be availed by an individual airline company will be USD 300million. This limit can be utilized for working capital as well as refinancing of the outstandingworking capital Rupee loan(s) availed of from the domestic banking system. ECB availed forworking capital/refinancing of working capital as above will not be allowed to be rolled over.

REPAYMENT OF RUPEE LOAN AND/OR FRESH RUPEE CAPITAL EXPENDITURE

FOR COMPANIES WITH CONSISTENT FOREX EARNINGS

Indian companies in the manufacturing, infrastructure sector and hotel sector (with a total projectcost of INR 250 crore or more irrespective of geographical location), can avail of ECBs forrepayment of outstanding Rupee loans availed of for capital expenditure from the domestic

banking system and/or fresh Rupee capital expenditure provided they are consistent foreignexchange earners during the past three financial years and not in the default list/caution list of the

Reserve Bank of India. The overall limit for such ECBs is USD 10 billion and the maximum ECBthat can be availed by an individual company or group, as a whole, under this scheme will berestricted to USD 3 billion. Further, the maximum permissible ECB that can be availed of by anindividual company will be limited to 75 per cent of the average annual export earnings realizedduring the past three financial years or 50 per cent of the highest foreign exchange earningsrealized in any of the immediate past three financial years, whichever is higher. In case of SpecialPurpose Vehicles (SPVs), which have completed at least one year of existence from the date ofincorporation and do not have sufficient track record/past performance for three financial years,the maximum permissible ECB that can be availed of will be limited to 50 per cent of the annualexport earnings realized during the past financial year. The foreign exchange for repayment ofECB should not be accessed from Indian markets and the liability arising out of ECB should be

extinguished only out of the foreign exchange earnings of the borrowing company.

END-USES NOT PERMITTED

Other than the purposes specified hereinabove, the borrowings shall not be utilised for any otherpurpose including the following purposes, namely:

(a) For on-lending or investment in capital market or acquiring a company (or a part thereof) inIndia by a corporate except Infrastructure Finance Companies (IFCs), banks and financialinstitutions.

(b) For real estate.

(c) For working capital and general corporate purpose and repayment of existing Rupee loans.

GUARANTEE

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks,financial institutions and NBFCs relating to ECB is not normally permitted. Applications for

providing guarantee/standby letter of credit or letter of comfort by banks, financial institutionsrelating to ECB in the case of SME will be considered on merit subject to prudential norms.


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SECURITY

The choice of security to be provided to the lender / supplier is left to the borrower. Powers havebeen delegated to Authorised Dealer Category I banks to issue necessary NOCs under FEMA.

Other necessary regulations shall be applicable in case of creation of charge over immovable assetsand financial securities.

PARKING OF ECB PROCEEDS

The proceeds of the ECB raised abroad meant for Rupee expenditure in India, such as, localsourcing of capital goods, on-lending to Self-Help Groups or for micro credit, payment forspectrum allocation, repayment of rupee loan availed from domestic banks, etc. should berepatriated immediately for credit to their Rupee accounts with AD Category I banks in India. In

other words, ECB proceeds meant only for foreign currency expenditure can be retained abroadpending utilization. The rupee funds, however, will not be permitted to be used for investment incapital markets, real estate or for inter-corporate lending.

ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits orCertificate of Deposit or other products offered by banks rated not less than AA (-) by Standardand Poor/ Fitch IBCA or Aa3 by Moodys; (b) Treasury bills and other monetary instruments ofone year maturity having minimum rating as indicated above and (c) deposits with overseas

branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that theinvestments can be liquidated as and when funds are required by the borrower in India.

Any action in contravention to the provisions of this Act shall invite penal action under the FEMA,1999.

PREPAYMENT

(a) Prepayment of ECB up to USD 500 million may be allowed by the AD bank without priorapproval of the Reserve Bank subject to compliance with the stipulated minimum average maturity

period as applicable to the loan.

(b) Pre-payment of ECB for amounts exceeding USD 500 million would be considered by the

Reserve Bank under the Approval Route.

PROCEDURE

Applicants are required to submit an application in form ECB through designated AD bank to theChief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, CentralOffice, External Commercial Borrowings Division, Mumbai400 001, along with necessarydocuments.


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CASE STUDY - BCCI

The BCCI was asked about the funding pattern of the IPL and the methods adopted for payment toforeign and Indian players. Under fire over allegations of foreign exchange violations in IPL,

BCCIs top officials on Wednesday blamed sacked Commissioner Lalit Modi for mistakes asthey told a Parliamentary panel that they had given approvals at his behest in good faith.

BCCI president Shashank Manohar, secretary N. Srinivasan and IPL chairman Chirayu Amin werequizzed by the Parliamentary Standing Committee on Finance for about two-and-a-half hoursabout the alleged FEMA violations. The BCCI was asked about the funding pattern of the highly

popular IPL and the methods adopted for payment to foreign and Indian players.

The Committee also sought details of the expenses incurred on the conduct of the second edition ofthe Twenty20 tournament in South Africa in 2009. The IPL was held in the African nation in 2009due to a clash of dates with the general elections in India.

Making a case of FEMA violation against the BCCI, the Committee said the Board had not takenpermission from RBI and Income Tax Department for opening and operating foreign currentaccount in South Africa. It said opening and operating of the account through an explicitagreement with the Cricket South Africa (CSA) could be construed as FEMA violation as theoperations of the account were controlled by BCCI.

The Committee also asked the BCCI officials if they were aware about a government report thatinvestments made by IPL franchisees such as Rajasthan Royals, Kolkata Knight Riders, Kings XIPunjab and Mumbai Indians were routed from outside India through entities, located in countriessuch as Mauritius, Bahamas, British Virgin Island. They asked why the BCCI did not take

approval from RBI, SIPB and other agencies for the foreign exchange transactions.It also asked how the BCCI ensures that FDI received by the franchisees is not tainted money. TheBCCI was also asked to explain the ownership and shareholding pattern of the IPL franchisees,saying that it has noticed that in certain cases the investment have been made by some

person/entity but share for corresponding money have been issued in the name of some otherpersons/entities.


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IMPORT AND EXPORTGUIDELINES

EXPORT

Export trade is regulated by the Directorate General of Foreign Trade (DGFT) and its regional

offices, functioning under the Ministry of Commerce and Industry, Department of Commerce,

Government of India.

AD CategoryI banks may conduct export transactions in conformity with the Foreign Trade

Policy in vogue and the Rules framed by the Government of India and the Directions issued by

Reserve Bank.

AD CategoryI banks have been permitted to issue guarantees on behalf of exporter clients on

account of exports out of India subject to specified conditions.

GENERAL GUIDELINES FOR EXPORTS

1. Realisation and Repatriation of export proceedsIt is obligatory on the part of the exporter to realise and repatriate the full value of goods or

software to India within a stipulated period from the date of export, as under :

i. Units located in SEZs shall realize and repatriate full value of goods / software / services, to

India within a period of twelve months from the date of export. Any extension of time beyond

the above stipulated period may be granted by Reserve Bank of India, on case to case basis.

ii. By Status Holder Exporters as defined in the Foreign Trade Policy : Within a period of twelve

months from the date of export;

iii. By 100 % Export Oriented Units (EOUs) and units set up under Electro

progression of fera to fema and how it facilitates foreign exchange market in india (3)

Documents