Clarifications to Exchange Control Regulations

 

The Reserve Bank of India (“RBI”) had introduced changes to the rules governing Overseas Direct Investment (“ODI”) and Liberalized Remittance Scheme (“LRS”) on August 14, 2013[#_ftn1][1](captured in BMR Edge dated August 20, 2013). In relation to these changes, certain clarifications have been issued to address queries from stakeholders, through circulars[#_ftn2][2]dated September 4, 2013. We have, in this edition of BMR Edge, summarized the clarifications and offered our comments thereon.

In addition to these clarifications, the RBI has also brought about changes to the Regulations governing External Commercial Borrowing (“ECB”) through a circular[#_ftn3][3]dated September 4, 2013 and has allowed non-resident investors to make foreign direct investments through the stock exchanges, subject to conditions, through a circular[#_ftn4][4]dated September 6, 2013. These changes which have been summarized here.

Clarifications on changes to the ODI regime

The ODI limit under the automatic route for all fresh ODI transactions was capped at 100 percent of net-worth of an Indian party (down from 400 percent) under the automatic route, except for investments by Navaratna public sector undertakings for which no limit is applicable as long as the projects are approved. In this connection, the following clarifications have been issued:

· Existing financial commitments made on or before August 14, 2013 will be governed by the earlier 400% limit and will not require any unwinding as per the new limits;

· The earlier limit of 400% will continue to apply in respect of financial commitments made by an Indian Party from the proceeds of an External Commercial Borrowing (“ECB”);

· Fresh financial commitments in an existing Joint Venture (“JV”)/ wholly owned subsidiaries (“WOS”) has to also be in compliance with the revised limit of 100 percent for the automatic route;

· Earlier limit of 400 percent is applicable for financial commitments contracted prior to August 14, 2013 for an existing JV/ WOS, and in such cases the designated Authorized Dealer Bank (“AD Bank”) is required to ensure the bonafides of the commitments entered;

· Even in case of a fresh acquisition of a JV/ WOS abroad, the earlier limit of 400 percent under the automatic route would be applicable in case a prior commitment was agreed upon on or before August 14, 2013, and in such cases also the designated AD Bank is required to ensure the bonafides of the commitments;

· All applications received by the RBI and AD Bank on or before August 14, 2013 would be examined and dealt under the earlier guidelines (which prescribed a higher limit of 400 percent);

· For computing the 100 percent limit, investments made by the Indian party earlier would also be taken into consideration;

· A fresh financial commitment by an Indian Party in an existing JV/ WOS of another Indian Party would have to be within the revised limit of 100 percent, under the automatic route; and

· Approving authority for overseas direct investments by Navaratna public sector undertakings, which was specified in the circular as ‘Government of India’ is to be read as 'Competent Authority’ which shall mean the Board of Directors of the respective PSU, Empowered Committee of the Secretaries and Cabinet Committee on Economic Affairs, depending on the amount involved.

Further, it has been clarified that the revised limit for ODI applies to the total financial commitment and includes investment in equity, loan, corporate guarantee or bank guarantee (backed by a collateral or guarantee by the Indian party), 50 percent of the performance guarantee, creation of charge over movable and immovable assets, pledge of shares, etc.