Category: Spotlight : Part C

Given below are the highlights of certain RBI Circulars &
Notifications

53.  A. P. (DIR Series)
Circular No.  6 dated October 20, 2016

Review of sectoral caps and simplification of Foreign Direct
Investment (FDI) Policy

This circular highlights the salient features of various
amendments made to the Consolidated FDI Policy by the Central Government from
time to time. The effect of these changes to the Consolidated FDI Policy, on
Notification No. FEMA. 20/2000-RB dated 3^rd May 2000 – Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident outside
India) Regulations, 2000, have been notified by RBI vide the following 3
Notifications: –

1.  Notification No.
FEMA.354/2015-RB dated October 30, 2015, (c.f. G.S.R No.823 (E) dated October
30, 2015).

2.  Notification No. FEMA
361/2016-RB dated February 15, 2016 (c.f. G.S.R No 165(E) dated February 15,
2016).

3.  Notification No. FEMA
362/2016-RB dated February 15, 2016, (c.f. G.S.R No. 166 (E) dated February 15,
2016).

54.  A. P. (DIR Series)
Circular No.  7 dated October 20, 2016

Notification No. FEMA 363/2016-RB dated April 28, 2016 

Investment by a Foreign Venture Capital Investor (FVCI) registered
under SEBI (FVCI) Regulations, 2000

This circular states that Schedule 6 of Notification No. FEMA.
20/2000-RB dated 3^rd May 2000 – Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India) Regulations,
2000, dealing with Investment in India by SEBI registered Foreign Venture Capital
Investors (FVCI) has been amended.

The amendments provide that SEBI registered FVCI: –

1.  Will not have to obtain
RBI permission for making investments under this Schedule.

2.  Can invest in equity or
equity linked instruments or debt instruments issued by an Indian company whose
shares are not listed on a recognised stock exchange at the time of issue of
the said securities / instruments provided the Company is engaged in any of the
following sectors: –

i)
Biotechnology

ii)
IT related to hardware and software
development

iii)
Nanotechnology

iv)
Seed research and development

v)
Research and development of new chemical
entities in pharmaceutical sector

vi)
Dairy industry

vii)
Poultry industry

viii)
Production of bio-fuels

ix)
Hotel-cum-convention centres with seating capacity of more than three thousand

x)
Infrastructure sector.

3.  Can invest in equity or
equity linked instruments or debt instruments issued by an Indian ‘startup’
irrespective of the sector in which the startup is engaged.

4.  Can invest in units of a
Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund
(Cat-I AIF) (registered under the SEBI (AIF) Regulations, 2012) or units of a
Scheme or of a fund set up by a VCF or by a Cat-I AIF. However, the VCF or
Cat-I AIF, which has received investment from FVCI, will have to comply with
the provisions for downstream investment as laid down in Schedule 11.

5.  Can open a foreign
currency account and / or a rupee account with a designated bank branch for the
purpose of making transactions only and exclusively under this Schedule.

6.  Must pay for all
investments out of inward remittance from abroad through normal banking
channels or out of sale / maturity proceeds of or income generated from
investment already made as per details mentioned above.

7.  Can, without restriction,
transfer any security / instrument held by it to any person resident in or
outside India.

The entity receiving investment directly from a registered FVCI
must report the investment in form FCGPR.

55.  A. P. (DIR Series)
Circular No.  8 dated October 20, 2016

Notification No. FEMA 375/2016-RB dated September 9, 2016

DIPP Press Note No. 6 (2016
Series) dated October 25, 2016

Foreign investment in Other
Financial
Services

Para 5.2.26 – “Non-Banking Financial Companies” – of the
Consolidated FDI Policy for 2016 has been replaced as under: –

56.  A. P. (DIR Series)
Circular No.  9 dated October 20, 2016

Rupee Drawing Arrangement – Trade related remittance limit

This circular states that the maximum value per trade transaction
under the Rupee Drawing Arrangement cannot be more than Rs. 15 lakh.

57.  A. P. (DIR Series)
Circular No.  10 dated October 20, 2016

External Commercial Borrowings (ECB) –
Extension and conversion

Presently, banks are permitted to approve changes in repayment
schedule of ECB prior to its maturity only if the average maturity and
all-in-cost are in conformity with applicable ceilings / norms.

This circular provides that banks can, subject to applicable
guidelines, also (a) grant extension and (b) permit conversion into equity – of
matured but unpaid ECB if: –

i.  No additional cost is incurred.

ii. Lender’s
consent is available.

iii.
Reporting requirements are fulfilled.

58.  A. P. (DIR Series)
Circular No.  11 [(1)/14(R)] dated
October 20, 2016

Foreign Exchange Management (Manner of
receipt and payment) Regulations, 2016

This circular highlights the changes made to the Foreign Exchange
Management (Manner of receipt and payment) Regulations, 2016 which have been
notified vide Notification No. FEMA 14 (R)/2016-RB dated May 02, 2016.

The changes pertain to: –

1.  Manner of receipt in
foreign exchange from: –

a.  Members of the Asian
Clearing Union (ACU).

b.  All other countries.

2.  Manner of payment in
foreign exchange from: –

a.  Members of the Asian
Clearing Union (ACU).

b.  All other countries.

59.  A. P. (DIR Series)
Circular No. 13 dated October 27, 2016

External Commercial Borrowings (ECB) by Startups

This circular contains the framework for raising ECB by Startups
recognised as such by the Central Government. The main highlights of the
framework are: –

Maturity: Minimum average maturity period must be 3 years.

Recognised lender: Lender / investor must be a
resident of a country who is either a member of Financial Action Task Force
(FATF) or a member of a FATF-Style Regional Bodies. However, the lender /
investor must not be: –

1.  From a country identified
in the public statement of the FATF as: –

i.   A jurisdiction having a
strategic Anti-Money Laundering or Combating the Financing of Terrorism
deficiencies to which counter measures apply; or

ii.  A jurisdiction that has
not made sufficient progress in addressing the deficiencies or has not
committed to an action plan developed with the Financial Action Task Force to
address the deficiencies.

2.  An Overseas branch /
subsidiary of an Indian bank and / or overseas wholly owned subsidiary / joint
venture of an Indian company.

Forms of Borrowing: Borrowing can be in the form of
loans or non-convertible, optionally convertible or partially convertible
preference shares. Also, the funds must come from a country which qualifies as
a Recognised Lender as mentioned above.

Currency: The borrowing must be denominated in any freely convertible
currency or in Indian Rupees (INR) or a combination of both. In case of
borrowing in INR, the non-resident lender, is required to mobilize INR through
swaps / outright sale undertaken through a bank in India.

Amount: Borrowing per Startup is limited to US $ 3 million or equivalent
per financial year either in INR or any convertible foreign currency or a
combination of both. However, provisions on leverage ratio and ECB liability:
Equity ratio will not be applicable.

All-in-cost: Must be mutually agreed between the borrower
and the lender.

Permitted End-uses: For any expenditure in connection
with the business of the borrower.

Conversion into equity: Subject to applicable Regulations
for foreign investment in Startups, conversion into equity is freely permitted.

Security: The choice of security to be provided to the lender is left to
the borrowing entity. Security can be in the nature of movable, immovable,
intangible assets (including patents, intellectual property rights), financial
securities, etc., and shall comply with foreign direct investment / foreign
portfolio investment / or any other norms applicable for foreign lenders /
entities holding such securities.

Corporate and personal guarantee: Issuance of corporate or
personal guarantee is allowed. Guarantee issued by non-resident(s) is allowed
only if such parties qualify as recognised lender(s) as mentioned above. However,
issuance of guarantee, standby letter of credit, letter of undertaking or
letter of comfort by Indian banks, all India Financial Institutions and NBFC is
not permitted.

Hedging: Where ECB is in INR the overseas lender can hedge its INR
exposure through permitted derivative products with banks in India. The lender
can also access the domestic market through branches / subsidiaries of Indian
banks abroad or branches of foreign bank with Indian presence on a back to back
basis.

Conversion rate: In case of borrowing in INR, the
foreign currency – INR conversion must be at the market rate on the date of
agreement.

Other provisions: The Startup will have to comply
with existing provisions like parking of ECB proceeds, reporting arrangements,
powers delegated to banks, borrowing by entities under investigation, etc.

60.  Circular No.
FMRD.DIRD.10/14.03.01/2016-17 dated October 28, 2016

Money Market Futures

Presently, only futures based on the 91-day Treasury Bill, which
is a money market instrument are permitted.

This circular now permits futures based on any money market
instrument or money market interest rate. Notification regarding the same is
enclosed with this Circular.

61.  A. P. (DIR Series)
Circular No. 14 dated November 03, 2016

Issuance of Rupee denominated bonds overseas by Indian banks

This circular now permits Indian banks, subject to certain
conditions and within the overall limit for foreign investment in corporate
bonds of Rs. 244,323 crore, to issue: –

i.   Perpetual Debt
Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and
debt capital instruments qualifying for inclusion as Tier 2 capital, by way of
Rupee Denominated Bonds overseas; and

ii.  Long term Rupee
Denominated Bonds overseas for financing infrastructure and affordable housing.

62.  A. P. (DIR Series)
Circular No. 15 dated November 07, 2016

External Commercial Borrowings (ECB) – Clarifications on hedging

This circular, with respect to hedging of ECB, clarifies as under:
–

i. Coverage: Wherever hedging has been mandated by the RBI,
the ECB borrower will be required to cover principal as well as coupon through
financial hedges. The financial hedge for all exposures on account of ECB
should start from the time of each such exposure (i.e. the day liability is
created in the books of the borrower).

ii. Tenor and rollover: A minimum tenor of one year of
financial hedge would be required with periodic rollover duly ensuring that the
exposure on account of ECB is not unhedged at any point during the currency of
ECB.

iii. Natural Hedge: Natural hedge, in lieu of financial hedge, will be considered only to
the extent of offsetting projected cash flows / revenues in matching currency,
net of all other projected outflows. For this purpose, an ECB may be considered
naturally hedged if the offsetting exposure has the maturity/cash flow within
the same accounting year. Any other arrangements/ structures, where revenues
are indexed to foreign currency will not be considered as natural hedge.

Further, it will be the banks responsibility to verify that 100%
hedging requirement is complied with.

63.  A. P. (DIR Series)
Circular No. 16 dated November 09, 2016

Government of India Notification published in the Gazette of India
vide S.O.3408(E) dated November 08, 2016

Withdrawal of the legal tender character of the existing and any
older series banknotes in the denominations of ? 500 and ? 1000

This circular provides that older series banknotes in the
denominations of ? 500 and ? 1000 will continue to be legal tender until
November 11, 2016 to the extent of transactions specified below: –

(i) At international airports, for arriving and departing
passengers, who possess specified bank notes, the value of which does not
exceed ? 5,000 to exchange them for notes which are legal tender; and

(ii) For foreign tourists to exchange foreign
currency or specified bank notes, the value of which does not exceed ? 5,000,
to exchange them for notes which are legal tender.

64.  A. P. (DIR Series)
Circular No. 17 dated November 11, 2016

Issue of Pre-Paid Instruments to foreign tourists

This circular permits Authorized Persons may
issue Pre-paid instruments to foreign tourists in terms of the instructions
issued by Department of Payments and Settlement System, Reserve Bank of India,
in exchange of foreign exchange tendered. Passport of the foreign tourist will
be a valid document for issuance of the said instruments.

65.  A. P. (DIR New Series)
Circular No. 18 [(1)/12 (R)]dated November 17, 2016

Notification No. FEMA. 12(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Insurance) Regulations, 2015

This Notification repeals and replaces the earlier Notification
No. FEMA 12/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management
(Insurance) Regulations, 2000.

Annexed to this circular are: –

a.  Memorandum of Foreign
Exchange Management Regulations relating to General/Health Insurance (GIM) in
India.

b.  Memorandum of Foreign
Exchange Management Regulations relating to Life Insurance (LIM) in India.

66.  A. P. (DIR Series) Circular No. 19 dated
November 17, 2016

Notification No. FEMA 374/2016-RB dated October 24, 2016

Investment by Foreign Portfolio
Investors (FPI) in corporate debt securities

This circular permits FPI to invest
in the following additional instruments: –

1.  Unlisted corporate debt
securities in the form of non-convertible debentures/bonds issued by public or
private companies subject to minimum residual maturity of three years and end
use-restriction on investment in real estate business, capital market and
purchase of land.

2.  Securitised debt
instruments as under: –

(a) any certificate or instrument
issued by a special purpose vehicle (SPV) set up for securitisation of asset/s
where banks, FIs or NBFCs are originators; and/or

(b) any certificate or instrument
issued and listed in terms of the SEBI Regulations on Public Offer and Listing
of Securitised Debt Instruments, 2008.

However, investment by FPI in the
unlisted corporate debt securities and securitised debt instruments must not
exceed Rs. 35,000 crore and must be within the extant investment limits
prescribed for corporate bond – the present limit is Rs. 2,44,323 crore.
Further, investment in securitised debt instruments will not be subject to the
minimum 3-year residual maturity requirement. _

BCAJ Admin