Fema and RBI

In this article, we have discussed recent amendments to FEMA through Circulars issued by RBI:–

1.      Third party payments for export/ import transactions

Presently third party payments for export of goods & software / import of goods are allowed subject to the conditions specified in A. P. (DIR Series) Circular No. 70 dated November 8, 2013.

It has now been decided that this requirement may not be insisted upon in case where documentary evidence for circumstances leading to third party payments/name of the third party being mentioned in the irrevocable order/ invoice has been produced. This shall be subject to conditions as under:

(i)    AD bank should be satisfied with the bona fides of the transaction and export documents, such as, invoice/FIRC.

(ii)    AD bank should consider the FATF statements while handling such transaction.

Further, with a view to liberalise the procedure, the limit of USD 100,000 eligible for third party payment for import of goods, stands withdrawn.

(A.P. (DIR Series) Circular No. 100 dated 4th February, 2014)

(This move will provide relief to exporters as this has been a long standing request by Federation of Indian Export Organisation (FIEO). Secondly there was a need to waive tripartite agreements for exports as most exports are being done on open terms and the dynamics for the same are dictated/settled by the buyers market rather than a sellers market.)

2.      Export of Goods and Services: Export Data Processing and Monitoring System (EDPMS)

As of now, AD banks are submitting the various returns like XOS (export outstanding statements), ENC (Export Bills Negotiated/sent for collection) for acknowledgement of receipt of Export documents, Schedules 3 to 6 (realization of export proceeds), EBW (write-off of export bills), ETX (extension of realisation of export bills) relating to export transaction under FEMA to RBI. These various returns are being
managed on a different solo application or manually.

With a view to simplify the procedure for filling various returns and for better monitoring, a comprehensive IT-based system called EDPMS has been developed which will facilitate the banks to report all the above-mentioned returns through a single platform. In the new system, the primary data on exports transactions including offsite software exports from all the sources viz. Customs/SEZ/STPI will flow to RBI secured server and then the same will be shared with the respective banks for follow up with the exporters. Subsequently, the document submission and realisation data will be reported back by the AD banks to RBI through the same secured RBI server so as to update the RBI database on real time basis to facilitate quicker follow up/data generation. The AD banks are required to download and upload the data on daily basis.

The system will also facilitate the Authorised Dealer to raise the Authorised Dealer (AD) transfer request in case of export document submitted to the Authorised Dealers other than declared in the export document which will discontinue the paper based NOC issued by the AD banks. AD banks have to approve/disapprove the AD transfer request within 7 days from date of request.

The date of inception of the system along with user credentials and web link for accessing the system would be communicated to the AD banks shortly through e-mail. For user name and password, AD banks are advised to submit a fill-in form through E-mail on or before February 10, 2014. Clarification required, if any, may also be sent to the aforesaid email-id of Reserve Bank of India.

A cut-off date for shipping documents to be reported in the new system will be notified shortly which will be the commencement date of the new system. The entire shipping document should be reported in the new system after cut-off date and old shipping documents would continue to be reported in the old system till completion of the cycle. Both the old and new systems will run parallel to each other for some time before the old system is discontinued.

(A.P. (DIR Series) Circular No. 101 dated 4th February, 2014)

3.      Foreign Direct Investment – Reporting under FDI Scheme: Amendments in form FC-GPR        

In terms of para 9(1)A of Schedule I to the FEMA Notification No. 20 dated May 3, 2000, Indian companies are required to report the details of the amount of consideration received for issuing shares and convertible debentures under the Foreign Direct Investment (FDI) scheme to the Regional Office of the Reserve Bank in whose jurisdiction the Registered Office of the company operates, within 30 days of receipt of the amount of consideration. Further, in terms of Para
9(1)B of Schedule
ibid, the companies are required to report the details of the issue of shares/convertible debentures in Form FC-GPR, to the Regional Office concerned, within 30 days of issue of shares/convertible debentures.

In order to further capture the granular details of FDI as regards Brownfield/Greenfield investments and the date of incorporation of investee company, Form FC-GPR has been revised. Accordingly, the details of FDI should, henceforth, be reported in the revised Form FC-GPR.

(A.P. (DIR Series) Circular No. 102 dated 11th February, 2014)

4.      Import of Gold / Gold Dore by Nominated Banks /Agencies/Entities – Clarifications

It has now been clarified that in case of Advance Authorisation (AA)/Duty Free Import Authorisation (DFIA) issued before August 14, 2013, the condition of sequencing imports prior to exports shall not be insisted upon even in case of entities/units in the SEZ and EoUs, Premier and Star Trading Houses.

The imports made as part of the AA/DFIA scheme will be outside the purview of the 20:80 scheme. Such imports will be accounted for separately and will not entitle the Nominated Agency/ Banks/Entities for any further import.

The Nominated Banks/Agencies/Entities may make available gold to the exporters (other than AA/DFIA holders) operating under the Replenishment Scheme. They can resort to import of gold for the purpose, if considered necessary. However, such import will be accounted for separately and will not entitle them for any further import.

Import of gold in the third lot onwards will be lesser of the two:

i)     Five times the export for which proof has been submitted; or

ii)     Quantity of gold permitted to a Nominated Agency in the first or second lot.

Further with reference to A.P. (DIR Series) Circular No. 82 dated December 31, 2013 on import of Gold Dore, it is clarified that:

i)     The refiners are allowed to import Gold Dore of 15% of their licence for each of the first two months.

ii)     In case, the quantity has already been identified by DGFT for first two lots, import of such quantity will be in compliance with the guidelines issued vide A.P. (DIR Series) Circular No. 82 dated December 31, 2013.

iii)    DGFT, through a notification, may include new refiners, and fix licence quantity for them.

(A.P. (DIR Series) Circular No. 103 dated 14th February, 2014)

(This clarification by RBI will benefit the country’s jewellery industry. It may also help to bring down huge premiums on gold in domestic market.)

5.      Foreign investment in India by SEBI registered FII, QFI and long-term investors in Corporate Debt

The present limit for investment by SEBI registered FIIs, QFIs and long-term investors in Corporate debt stands at USD 51 billion. Out of the above limit of USD 51 billion, a sub-limit of USD 3.5 billion is available for investment by eligible investors in Commercial Paper (CP). This sub-limit is being presently utilised only to the extent of around 58% of the limit put in place by SEBI.

To encourage long-term investors, it has now been decided, to reduce, with immediate effect, the existing Commercial Paper sub-limit of USD 3.5 billion by USD 1.5 billion to USD 2 billion. The balance USD 1.5 billion shall, however, continue to be part of the total Corporate debt limit of USD 51 billion and will be available to eligible foreign investors for investment in Corporate debt. The operational guidelines in this regard will be issued by SEBI.

The revised position is given below:



Eligible Investors


Corporate Debt including Commercial Papers

USD 51 billion

FIIs, QFIs and long terms investors registered with SEBI – Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks.

Eligible Investors may invest in Commercial Papers only up to USD 2 billion within the limit of USD 51 billion


(A.P. (DIR Series) Circular No. 104 dated 14th February, 2014)

(This will provide more leeway for foreign investors to utilise funds under corporate debt categories and on long-term basis)

6.      External Commercial Borrowings (ECB) – Reporting arrangements

It has now been decided that in order to capture details of the financial hedges contracted by corporates, of their foreign currency exposure relating to ECB and their foreign currency earnings and expenditure, the format of ECB-2 Return has been modified (Part-E). The reporting in the modified ECB-2 Return will be applicable from the return of the month April 2014 onwards.

There is no change in the reporting procedure and corporates raising ECB continue to submit ECB-2 Return on a monthly basis duly certified by the designated AD Category-I bank so as to reach Department of Statistics and Information Management (DSIM) of Reserve Bank of India within seven working days from the close of month to which it relates.

(A.P. (DIR Series) Circular No. 105 dated 17th February, 2014)

7.      Facilities to NRIs/PIOs and Foreign Nationals – Liberalisation - Reporting requirement

In terms of A.P. (DIR Series) Circular No. 12 dated November 16, 2006, AD – Category I banks were required to furnish on a quarterly basis, a statement on the number of applicants and total amount remitted in the format as prescribed therein relating to remittances (up to permissible limit of USD one million per financial year (April-March)) out of balances in NRO accounts, to the Chief General Manager-in-Charge, Foreign Exchange Department, Foreign Investments Division (NRFAD), Reserve Bank of India, Central Office, Mumbai – 400 001 within 10 days of the reporting quarter.

With a view to having access to more real time data, RBI has now decided to collect this information on a monthly basis within 7 days of the end of the reporting month. This data could also be sent by e-mail as per the proforma.

Further, the proforma has been revised to also include “Transfers from NRO to NRE account”.

(A.P. (DIR Series) Circular No. 106 dated 18th February, 2014)

8.      Foreign Direct Investment (FDI) into a Small Scale Industrial Undertakings (SSI)/Micro & Small Enterprises (MSE) and in Industrial Undertaking manufacturing items reserved for SSI/MSE

RBI has issued this circular to give effect to Press Note No. 6(2009) dated September 4, 2009 issued by Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India.

(A.P. (DIR Series) Circular No. 107 dated 20th February, 2014)

9.      Exim Banks line of credit of USD 10 million to the Govt. of the Republic of Nicaragua

The Credit Agreement under the LOC is effective from January 31, 2014 and the date of execution of Agreement is June 14, 2013.

(A.P. (DIR Series) Circular No. 108 dated 24th February, 2014)

10.   Export of Goods and Services: Export Data Processing and Monitoring System (EDPMS)

With further reference to A.P. (DIR Series) Circular No. 101 dated 4th February, 2014 (as enumerated above), RBI has informed that EDPMS has been operationalised with effect from February 28th, 2014 and would be
available to AD Banks with effect from March 1, 2014.

(A.P. (DIR Series) Circular No. 109 dated 28th February, 2014)







In this article, we have discussed recent amendments to FEMA through Circulars issued by RBI :

1.      Overseas Direct Investments – Rollover of Guarantees

In terms of Regulation 6 of Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] (the Notification), RBI has now decided not to treat/reckon the renewal/rollover of an existing/original guarantee, which is part of the total financial commitment of the Indian party as a fresh financial commitment, provided that :

a)    the existing/original guarantee was issued in terms of the then extant/prevailing FEMA guidelines.

b)    there is no change in the end use of the guarantee, i.e. the facilities availed by the JV/ WOS/Step Down Subsidiary;

c)     there is no change in any of the terms & conditions, including the amount of the guarantee except the validity period;

d)    the reporting of the rolled over guarantee would be done as a fresh financial commitment in Part II of Form ODI, as hitherto; and

e)    if the Indian party is under investigation by any investigation/enforcement agency or regulatory body, the concerned agency /body would have to be kept informed about the same.

RBI has further clarified that in case, however, the above conditions are not met, the Indian party has to obtain prior approval of the Reserve Bank for rollover/renewal of the existing guarantee through the designated AD bank.

(A.P. (DIR Series) Circular No. 83 dated 3rd January, 2014)

(This will come as a breather to many Indian companies after recent reduction in overall financial commitment from 400% to 100% of net worth under automatic route.)

2.      Issue of non-convertible/redeemable bonus preference shares or debentures – Clarifications

In terms of Regulation 2(ii) and Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 notified vide Notification No. FEMA.20/2000-RB dated May 3, 2000, equity shares, compulsorily and mandatorily convertible preference shares and compulsorily and mandatorily convertible debentures are treated as a part of share
capital for the purpose of Foreign Direct Investment.

Hitherto, RBI used to grant permission for issue of non-convertible/redeemable bonus preference shares or debentures to non-resident shareholders from the general reserve under a Scheme of Arrangement by a Court, under the provisions of the Companies Act, as applicable.

Indian companies are now given general permission to issue non-convertible/redeemable preference shares or debentures to non-resident shareholders (including the depositories that act as trustees for the ADR/GDR holders) by way of bonus from its general reserves. However, this general permission is subject to two conditions and they are: (i) issue of such bonus shares/debentures must be in accordance with a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, and (ii) obtaining a no-objection from the Income Tax Authorities.

(A.P. (DIR Series) Circular No. 84 dated 6th January, 2014)

(It may be noted that such general permission has been granted only for issuance of bonus preference shares or debentures to non-residents.)

3.      External Commercial Borrowings (ECB) Policy – Liberalisation of definition of Infrastructure Sector

In terms of Notification No. FEMA.281/2013-RB dated July 19, 2013 published in the Gazette of India vide G.S.R. No. 627 (E) dated September 12, 2013 and to the A.P. (DIR Series) Circular No. 48 dated September 18, 2013, the definition of infrastructure sector for the purpose of raising ECB was expanded by RBI after taking into account the Harmonised Master List of Infrastructure sub-sectors and Institutional Mechanism for its updation as approved by Government of India vide Notification F.No. 13/06/2009-INF dated March 27, 2012.

RBI has now decided to include ‘Maintenance, Repairs and Overhaul’ (MRO) as a part of airport infrastructure for the purpose of ECB. RBI has further clarified that accordingly, only MRO associated with airport infrastructure (as distinct from the related services which are other than infrastructure) will be considered as part of the sub-sector of Airport in the Transport Sector of Infrastructure.

(A.P. (DIR Series) Circular No. 85 dated 6th January, 2014)

4.      Foreign Direct Investment – Pricing Guidelines for FDI instruments with optionality clauses

In terms of Regulation 5 (1) of Foreign Exchange Management (Transfer and Issue of Shares by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, only equity shares or compulsorily convertible preference shares/ compulsorily convertible debentures are eligible to be issued to persons resident outside India under the Foreign Direct Investment Scheme.

RBI has now allowed optionality clauses in equity shares and compulsorily and mandatorily convertible preference shares/debentures to be issued to a person resident outside India under the Foreign Direct Investment (FDI) Scheme. Such optionality clause should oblige the buy-back of securities from the investor at the price prevailing/value determined at the time of exercise of the optionality in order to enable the investor to exit without any assured return. The provision of optionality clause would be subject to the following conditions:

a)    There should be a minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence and construction development sector where the lock-in period of three years has been prescribed). The lock-in period should be effective from the date of allotment of such shares or convertible debentures or as prescribed for defence and construction development sectors, etc. in Annex B to Schedule 1 of extant FEMA Notification No. 20;

b)    After the lock-in period, as applicable above, the non-resident investor exercising option/right would be eligible to exit without any assured return, as under:

(i)    In case of a listed company, the non-resident investor would be eligible to exit at the market price prevailing at the recognised stock exchanges;

(ii)    In case of unlisted company, the non-resident investor would be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet. Any agreement permitting return linked to equity as above would not be treated as violation of FDI policy/FEMA Regulations. [Note: For the above purpose, RoE shall mean Profit After Tax / Net Worth; Net Worth would include all free reserves and paid-up capital.]

(iii)   Investments in Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible Preference Shares (CCPS) of an investee company could be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. RBI has further stated that the guiding principle would be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and would exit at the price prevailing at the time of exit, subject to lock-in period requirement, as applicable.

RBI has notified the above changes vide Notification No. FEMA. 294/2013-RB dated November 12, 2013 vide G.S.R. No. 805(E) dated December 30, 2013.

(A.P. (DIR Series) Circular No. 86 dated 9th January, 2014)

(Post issuance of this circular, RBI has updated the FAQs on Foreign Investments in India to incorporate the change in policy. Analysis and important implications of the change in this policy is presented as below:

•       RBI has clarified in updated FAQs that the entry time pricing guidelines would be the same for FDI with or without optionality (i.e., based on DCF method). But there would be two sets of pricing guidelines at the time of exit of non-resident from FDI. One applicable to plain FDI instruments (i.e., based on DCF method) and another for FDI with optionality clause (i.e., based on ROE).

•       In FAQ No. 48, RBI has clarified that in case of an unlisted company, the non-resident investor would be able to exit at a price which gives annualised return equal to or less than the RoE as per latest audited balance sheet. For example, ROE based on previous year’s audited balance sheet (assuming no audit has been carried out specifically for the purposes of exit) arrives at 15% and assume that the investment had been made five years prior to the time of exit. Therefore, as per this FAQ, the exit price would be calculated as (Cost of Investment + Return @ Compounded Annual Growth Rate of 15% for five years). As a result, the exit price would unduly and unjustly be dependent on the ROE of the previous year, not taking into account the profits/losses made/incurred by the company in the previous year.

•       It seems RBI has not envisaged situations of incurrence of loss in the particular year based on which ROE has to be computed, at the time of devising these guidelines.

•       These pricing guidelines would make investments in CCDs and CCPS more attractive wherein valuations based on forward looking projections can continue to be adopted.)

5.      Resident bank account maintained by residents in India – Jointholder – Liberalisation

Hitherto, in terms of A.P. (DIR Series) Circular No. 12 dated September 15, 2011, individuals resident in India were permitted to include non-resident close relative(s) (relatives as defined in section 6 of the Companies Act, 1956) as a joint holder(s) in their resident savings bank accounts on “former or survivor” basis. Such non-resident Indian close relatives were however not eligible to operate the account during the life time of the resident account holder in terms of said instructions.

RBI has now decided to allow AD banks to include a NRI close relative (relatives as defined in section 6 of the Companies Act, 1956) in existing/new resident bank accounts as joint holder with the resident account holder on “Either or Survivor” basis subject to the following conditions :

a)    Such account would be treated as resident bank account for all purposes and all regulations applicable to a resident bank account would be applicable.

b)    Cheques, instruments, remittances, cash, card or any other proceeds belonging to the NRI close relative would not be eligible for credit to this account.

c)     The NRI close relative has to operate such account only for and on behalf of the resident for domestic payment and not for creating any beneficial interest for himself.

d)    Where the NRI close relative becomes a joint holder with more than one resident in such account, such NRI close relative should be the close relative of all the resident bank account holders.

e)    Where due to any eventuality, the non-resident account holder becomes the survivor of such an account, it would be categorised as Non-Resident Ordinary Rupee (NRO) account as per the extant regulations.

f)     Onus would be on the non-resident account holder to keep AD bank informed to get the account categorised as NRO account and all such regulations as applicable to NRO account would be applicable.

g)    The above joint account holder facility can be extended to all types of resident accounts including savings bank account.

While extending this facility the AD banks have been asked to verify actual need for such a facility and also obtain a declaration duly signed by the non-resident account holder as given in the Circular.

(A.P. (DIR Series) Circular No. 87 dated 9th January, 2014)

(This is a welcome step which will particularly help NRIs having single elderly parents residing in India wherein they would now be able to operate the savings bank accounts online for and on behalf of their parents)

6.      Memorandum of Instructions for opening and maintenance of Rupee/ Foreign Currency Vostro Accounts of Non-Resident Exchange Houses

In view of expanding the scope of the Rupee Drawing Arrangements (RDAs), RBI has amended the instructions pertaining to
RDAs with Exchange Houses to include additional items under Permitted Transactions under RDAs.

Following three additional transactions have been now permitted under such RDAs:

•      Payments to utility service providers in India, for services such as water supply, electricity supply, telephone (except for mobile top-ups), internet, television, etc.

•      Tax payments in India

•      EMI payments in India to Banks and Non-Banking Financial Companies (NBFCs) for repayment of loans.

(A.P. (DIR Series) Circular No. 88 dated 9th January, 2014)

7.      Exim Banks line of credit of USD 42.61 million to the Govt. of the Republic of Benin

The Credit Agreement under the LOC is effective from December 16, 2013 and the date of execution of Agreement is September 6, 2013.

(A.P. (DIR Series) Circular No. 89 dated 9th January, 2014)

8.      Provisions under section 6(4) of Foreign Exchange Management Act, 1999 – Clarifications

In terms of section 6(4) of FEMA, 1999, a person resident in India can hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

In response to various representations received by RBI, it has given clarifications on the scope of transactions covered under section 6(4) of FEMA, 1999 to include the following:

a)    Foreign currency accounts opened and maintained by such a person when such person was a resident outside India;

b)    Income earned through employment or business or vocation outside India taken up or commenced while such person was resident outside India, or from investments made while such person was resident outside India, or from gift or inheritance received while such a person was resident outside India;

c)     Foreign exchange including any income arising therefrom, and conversion or replacement or accrual to the same, held outside India by a person resident in India acquired by way of inheritance from a person resident outside India;

d)    A person resident in India can freely utilise all their eligible assets abroad as well as income on such assets or sale proceeds thereof received after their return to India for making any payments or to make any fresh investments abroad without approval of Reserve Bank, provided the cost of such investments and/or any subsequent payments received therefor are met exclusively out of funds forming part of eligible assets held by them and the transaction is not in contravention to extant FEMA provisions.

(A.P. (DIR Series) Circular No. 90 dated 9th January, 2014)

(It is a welcome circular from RBI which would mainly benefit the returning Indians and help in avoiding administrative delays at the end of AD Banks.)

9.      Exim Banks line of credit of USD 125 million to the Govt. of the Republic of Sudan

The Credit Agreement under the LOC is effective from December 20, 2013 and the date of execution of Agreement is July 24, 2013.

(A.P. (DIR Series) Circular No. 91 dated 13th January, 2014)

10.   Risk Management and Inter-Bank Dealings

Hitherto, the facility of cancellation and rebooking was not permitted for forward contracts, involving rupee as one of the currencies, booked by residents to hedge current and capital account transactions. However, exporters were allowed to cancel and rebook forward contracts to the extent of 50 per cent of the contracts booked in a financial year for hedging their contracted export exposures and importers were allowed to cancel and rebook forward contracts to the extent of 25 per cent of the contracts booked in a financial year for hedging their contracted import exposures.

In view of evolving market conditions and to provide operational flexibility in respect of current and capital account transactions, RBI has now decided to allow, in case of contracted exposures, forward contracts in respect of all current account transactions as well as capital account transactions with a residual maturity of one year or less to be freely cancelled and rebooked. With respect to forward contracts booked by FIIs/QFIs/other portfolio investors for their contracted exposures, upon cancellation, rebooked would be allowed only up to the extent of 10 per cent of the value of the contracts cancelled. The forward contracts booked by these investors would, however, be allowed to rolled over on or before maturity.

(A.P. (DIR Series) Circular No. 92 dated 13th January, 2014)

11.   Clarifiaction – Establishment of Liaison Office/ Branch Office/ Project Office in India by Foreign Entities – General Permission

In terms of Regulation 4 of Notification No. FEMA.22/2000-RB dated May 3, 2000, Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000, no entity or person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China can establish a branch office or a liaison office or a project office or any other place of business by whatever name called in India without the prior permission of RBI.

RBI vide this circular has clarified that the above stipulation would also apply to entities from Hong Kong and Macau.

(A.P. (DIR Series) Circular No. 93 dated 15th January, 2014)

12.   Clarification – Conversion of External Commercial Borrowing and Lump sum Fee/Royalty into Equity

An Indian company can issue equity shares against External Commercial Borrowings (ECB) subject to conditions mentioned therein and pricing guidelines as prescribed by the Reserve Bank from time to time regarding value of equity shares to be issued.

RBI has now given clarification regarding the rate of exchange that shall be applied to the amount in foreign currency borrowed or owed by the resident entity from/to the non-resident entity.

It is clarified that where the liability sought to be converted by the company is denominated in foreign currency as in case of ECB, import of capital goods, etc. it will be in order to apply the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion. Reserve Bank will have no objection if the borrower company wishes to issue equity shares for a rupee amount less than that arrived at as mentioned above by a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.

It is further clarified that the principle of calculation of INR equivalent for a liability denominated in foreign currency as mentioned herein shall apply, mutatis mutandis, to all cases where any payables/liability by an Indian company such as, lump sum fees/royalties, etc. are permitted to be converted to equity shares or other securities to be issued to a non-resident subject to the conditions stipulated under the respective Regulations.

(A.P. (DIR Series) Circular No. 94 dated 16th January, 2014)

13.   Merchanting trade transactions

Guidelines for merchanting or intermediary trade transactions have been reviewed accordingly:

i.      Goods involved in the merchanting or intermediary trade transactions would be the ones that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, at the time of entering into the contract and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry) are complied with for the export leg and import leg respectively;

ii.     Both the legs of a merchanting or intermediary trade transaction are routed through the same AD bank. The bank should verify the documents like invoice, packing list, transport documents and insurance documents and satisfy itself about the genuiness of the trade.

iii.    The entire merchanting or intermediary trade transactions should be completed within an overall period of nine months and there should not be any outlay of foreign exchange beyond four months.

iv.    The commencement of merchanting or intermediary trade would be the date of shipment/export leg receipt or import leg payment, whichever is first. The completion date would be the date of shipment/export leg receipt or import leg payment, whichever is the last;

v.     Short-term credit either by way of suppliers' credit or buyers' credit will be available for merchanting or intermediary trade transactions including the discounting of export leg LC by an AD bank, as in the case of import transactions;

vi.    AD bank should ensure one-to-one matching in case of each merchanting or intermediary trade transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI on half yearly basis in the format as annexed. The deadline for submission of the report would be 15 calendar days after the close of each half year. In case of repeated defaults i.e. three cases or more in a year, ADs should restrain the traders from entering into any further transaction in merchanting or intermediary trade and consider recommending caution listing of the trader, to the Reserve Bank of India;

vii.   The merchanting traders have to be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. Authorised Dealer should satisfy itself about the capabilities of the merchanting trader to perform the obligations under the order. The transactions should result in reasonable profits to the merchanting trader.

viii.   The inward remittance from the overseas buyer should preferably be received first and the outward remittance to the overseas supplier will be made subsequently. Alternatively, an irrevocable Letter of Credit (LC) should be opened by the buyer in favour of the merchant. On the strength of such LC the merchant in turn may open a LC in favour of the overseas supplier. The terms of payment under both the LCs should be such that payment for import LC is required to be made after receipt of payment under export LC. The export LC should be issued in the name of original merchanting trader in India and import LC should be favouring the original supplier. In case export leg payment is received in advance, AD banks need not insist on opening of export LC.

ix.    In case advance against the export leg is received by the merchanting trader, the advance payment may be held in a separate deposit/current account in foreign currency or Indian Rupees. The amount required for import leg should be earmarked till the payment of import and should not be made available to the merchanting trader for use, other than for import payment or short-term deployment of fund limited to the import payable, with the same AD for the intervening period. If advance for the import leg is demanded by the overseas seller, the same should be paid against bank guarantee from an international bank of repute.

x.     Reporting for merchanting or intermediary trade for compilation of R-return should be done on gross basis, against the undernoted codes :


Purpose Code under FETERS




Goods sold under merchanting/receipt against export leg of merchanting trade



Goods acquired under merchanting /payment against import leg of merchanting trade


(A.P. (DIR Series) Circular No. 95 dated 17th January, 2014)

14.   Clarification – Facilities for Persons Resident outside India

Foreign Institutional Investors (FIIs) are allowed to approach any AD Category – I bank for hedging their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date subject to conditions specified therein.

It is clarified that a foreign investor is free to remit funds through any bank of its choice for any transaction permitted under FEMA, 1999 or the Regulations/Directions framed thereunder. The funds thus remitted can be transferred to the designated AD Category – I custodian bank through the banking channel. Note should, however, be taken that KYC in respect of the remitter, wherever required, is a joint responsibility of the bank that has received the remittance as well as the bank that ultimately receives the proceeds of the remittance. While the first bank will be privy to the details of the remitter and the purpose of the remittance, the second bank, will have access to complete information from the recipient's perspective. Besides, the remittance receiving bank is required to issue FIRC to the bank receiving the proceeds to establish the fact the funds had been remitted in foreign currency.

(A.P. (DIR Series) Circular No. 96 dated 20th January, 2014)

15.   Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 Money changing activities

Based on several representations received from Authorised Money Changers (AMCs), regarding difficulties in submitting Resolution of the Board of Directors for undertaking foreign exchange transactions with an AMC and also Power of Attorney granted to its officials to conduct forex transactions on behalf of the company, it has been decided to rationalise the same. Accordingly, the requirement of Resolution of the Board of Directors is being done away with and a corporate may now submit to the AMC a list of officials with names and signatures authorised by the Managing Director/Chief Financial Officer of the company to conduct forex transactions on its behalf. The amended instructions are given below:


Extant Guidelines

Revised Guidelines



Establishment of Business Relationship –Corporate

Certified copy each of the following documents.

i.      Certificate of incorporation

ii.     Memorandum & Articles of Association

iii.    Resolution of the Board of Directors for undertaking forex transactions with the AP

iv.    Power of attorney granted to its managers, officers or employees to conduct forex transactions on behalf of the corporate and their identification

v.     PAN Card

vi.    Telephone Bill

Certified copy each of the following documents.

i.      Certificate of incorporation

ii.     Memorandum & Articles of Association

iii.    List of officials with names, designation and signatures authorised by the Managing Director/Chief Financial Officer of the company to conduct forex transactions on behalf of the company

iv.    PAN Card

v.     Telephone Bill

Note: Corporate should invariably pay to AMCs towards rupee leg of forex transactions through a cheque/bank account of corporate irrespective of the amount of forex transaction


These guidelines are also applicable mutatis mutandis to all agents/franchisees of Authorised Persons and it will be the sole responsibility of the franchisers to ensure that their agents/ franchisees also adhere to these guidelines.

(A.P. (DIR Series) Circular No. 97 dated 20th January, 2014)

16.   Exim Banks line of credit of USD 19.50 million to the Govt. of the Socialist Republic of Vietnam

The Credit Agreement under the LOC is effective from December 27, 2013 and the date of execution of Agreement is July 11, 2013.

(A.P. (DIR Series) Circular No. 98 dated 27th January, 2014)

17.   Foreign investment in India by SEBI registered long-term investors in Government dated securities

Present limit for investments by FIIs, QFIs and long term investors in Government securities stands at USD 30 billion, out of which a sub-limit of USD 5 billion is available for investment by long-term investors in Government dated securities.

It has now been decided that the existing sub-limit of USD 5 billion available to long term investors registered with SEBI – Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/Insurance/Endowment Funds and Foreign Central Banks for investment in Government dated securities be enhanced to USD 10 billion, within the total limit of USD 30 billion available for foreign investments in Government securities.

(A.P. (DIR Series) Circular No. 99 dated 29th January, 2014)

(This is a good move by RBI with a view to attract more funds in India.)

In this article, we have discussed recent amendments to FEMA through RBI Notifications/Circulars and advisory issued by RBI through a Press Release:


1. ECB by holding Cos./Core Investment Cos. for the project use in SPVs

In further relaxation of the ECB guidelines prescribed vide AP Dir Circular No. 5 dated 1st August, 2005 and amended from time to time, RBI has now permitted Holding Companies / Core Investment Companies (CICs) coming under the regulatory framework of the Reserve Bank to raise ECB under the automatic route/approval route for project use in Special Purpose Vehicles (SPVs) with the following terms and conditions:

  1. The business activity of the SPV should be in the infrastructure sector where “infrastructure” is defined as per the extant ECB guidelines;

  2. The infrastructure project is required to be implemented by the SPV established exclusively for implementing the project;

  3. The ECB proceeds is utilised either for fresh capital expenditure (capex) or for refinancing of existing Rupee loans (under the approval route) availed of from the domestic banking system for capex as per the extant norms on refinancing;

  4. The ECB for SPV can be raised up to 3 years after the Commercial Operations Date of the SPV;

  5. The SPV should give an undertaking that no other method of funding, such as, trade credit (if for import of capital goods), etc. will be utilised for that portion of fresh capital expenditure financed through ECB proceeds;

  6. The ECB proceeds should be kept in a separate escrow account as per the extant guidelines on parking of ECB proceeds pending utilisation for permissible end-uses and use of such proceeds should be strictly monitored by the ADs for permissible uses;

  7. In case of Holding Companies that come under the Core Investment Company (CIC) regulatory framework of the Reserve Bank, the additional terms and conditions for raising ECB for project use in SPVs will be as under:-

  1. The ECB availed is within the ceiling of leverage stipulated for CICs, i.e., their outside liabilities including ECB cannot be more than 2.5 times of their adjusted net worth as on the date of the last audited balance sheet; and

  2. In case of CICs with asset size below Rs. 100 crore, the ECB availed of should be on fully hedged basis.

(A.P. (DIR Series) Circular No. 78 dated 3rd December, 2013)

(In the infrastructure development industry, FDI is either invited into specific SPV formed for each project or into the holding company if the foreign investor wants an exposure to a portfolio of infrastructure assets. In sync with the industry model, this move would allow ECBs to be raised by Holding Companies rather than by different SPVs individually. Another peculiar point to be noted in this circular is that RBI has specified the time limit for raising of ECB for the first time.)

  1. Exim Banks line of credit of USD 30.94 million to the Govt. of Lao People’s Democratic Republic

The Credit Agreement under the LOC is effective from November 26, 2013 and the date of execution of Agreement is September 9, 2013.

(A.P. (DIR Series) Circular No. 79 dated 6th December, 2013)

  1. Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between Government of India and erstwhile USSR
    In terms of AP Dir. Circular 76 dated 22nd October, 2013, the Rupee value of the Special Currency Basket was indicated as Rs. 83.819978 effective from November 18, 2013.

Upon revision on December 9, 2013, the Rupee value of the Special Currency Basket has been fixed at Rs. 83.564155 with effect from December 12, 2013.

(A.P. (DIR Series) Circular No. 80 dated 16th December, 2013)

  1. Investments by persons resident outside India in the tax free, secured, redeemable, non-convertible bonds – Use of borrowed funds
    Regulation No. 6 (2) of FEMA Notification No. FEMA 4/2000 [Foreign Exchange Management (Borrowing and Lending in Rupees)] imposes restrictions on person resident in India who have borrowed in Rupees from a person resident outside India to the effect that such borrowed funds cannot be used for any investment, whether by way of capital or otherwise, in any company or partnership firm or proprietorship concern or any entity, whether incorporated or not, or for relending.

In a move to relax the above restrictions, RBI has allowed resident entities/companies in India which have issued tax-free, secured, redeemable, non-convertible bonds in rupees to persons resident outside India to use such borrowed funds for following purposes:

  1. lending/re-lending to the infrastructure sector; and

  2. keeping in fixed deposits with banks in India pending utilisation by them for permissible end-uses.

(A.P. (DIR Series) Circular No. 81 dated 16th December, 2013)

(There have been several previous instances of issuance of tax free bonds to non-residents, particularly, FIIs, QFIs, NRIs. In the Shelf Prospectus for such bonds, resident entities (such as PFC, REC) have specifically disclosed utilization of issue proceeds towards lending operations of the company and interim deployment of funds in liquid instruments under ‘Objects of the Issue’. Further, they have also noted compliance with FEMA Notification 4/2000 in the Shelf Prospectus implicitly acknowledging that neither amounts to ‘investment’ or ‘relending’. Under such circumstances, the intention of issuance of this circular remains unclear and further puts in doubt interim deployment of funds in liquid instruments other than fixed deposits with banks.)

  1. Import of Gold by Nominated Banks/Agencies/Entities

Recently, RBI vide A.P. (DIR Series) Circular No. 25 dated August 14, 2013 and A.P. (DIR Series) Circular No. 73 dated November 11, 2013 has imposed restrictions on import of gold with a view to contain Current Account Deficit (CAD).

Since then, Government of India and the Reserve Bank of India have been receiving representations related to import of gold dore. Taking into account these representations and in consultation with the Government of India, RBI has issued the following clarifications which shall come into force with immediate effect :

  1. Refineries are allowed to import dore up to 15% of their gross average viable quantity based on their licence entitlement in the first two months for making this available to the exporters on First in First out (FIFO) basis. Subsequent to this, the quantum of gold dore to be imported should be determined lot-wise on the basis of export performance.

  2. Before the next import, not more than 80% shall be allowed to be sold domestically.

  3. The dore so imported shall be refined and shall be released based on FIFO basis following 20:80 principle. This would be monitored by CBEC as earlier.

  4. The imports, thereafter, shall be allowed only up to 5 times the quantum for which proof of export has been submitted. This shall be on accrual basis.
    (A.P. (DIR Series) Circular No. 82 dated 31st December, 2013)
    (This is a welcome relaxation by the RBI to allow import of gold dore into India. It should also help reduce unauthorised import of gold into India as has been reported recently in press reports.)


1. RBI cautions users of Virtual Currencies against Risks RBI has issued an advisory to users, holders and traders of Virtual Currencies (VCs) including Bitcoins explaining exposure the potential financial, operational, legal, customer protection and security related risks.

It has categorically stated that creation, trading or usage of VCs including Bitcoins, as a medium for payment are not authorised by it or any other central bank or monetary authority and that further, no regulatory approvals, registration or authorisation is stated to have been obtained by the entities concerned for carrying on such activities.

It has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations. (Press Release: 2013-2014/1261)
(With the media hype around Bitcoin trading and the surge in its value, RBI has made its stand clear on this issue.



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