CONTENTS

KEY TERMS (FDI)………………………………………………………………………………………………………………………………………2

ENVIRONMENT PREVAILING DURING FERA.................................................................................................3

Indian forex market since independence can be grouped in three distinct phases:......................................

1947-1977...............................................................................................................................................3

1978-1992...............................................................................................................................................3

1992 onwards..........................................................................................................................................4

NEED TO INTRODUCE FERA.........................................................................................................................5

OBJECTIVES OF FERA...................................................................................................................................5

FERA ACT…………………………………………………………………………………………………………………………………………………6

WHY FERA WAS REPLACED..........................................................................................................................7

COMPARISON – FERA & FEMA....................................................................................................................8

RELEVANT PROVISIONS WITH RESPECT TO FDI.........................................................................................10

EXTERNAL COMMERCIAL BORROWINGS (ECB) –IN CONTEXT OF FEMA....................................................20

FEMA REGULATIONS RELATING TO EXPORTS, IMPORTS...........................................................................25

STATISTICS.................................................................................................................................................38

RIDDHI SIDDHI BULION CASE………………………………………………………………………………………………………………...41

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KEY TERMS (FDI)

AD Category-I Bank means a bank (Scheduled Commercial, State or Urban Cooperative) which is authorized under Section 10(1) of FEMA to undertake all current and capital account transactions according to the directions issued by the RBI from time to time.

Authorized Dealer means a person authorized as an authorized dealer under sub-section (1) of section 10 of FEMA.

Erstwhile Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least sixty percent by non-resident Indians and includes overseas trust in which not less than sixty percent beneficial interest is held by non-resident Indians directly or indirectly but irrevocably and which was in existence on the date of commencement of the Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs) )Regulations, 2003.

Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign currency, the principal and interest of which is payable in foreign currency.

Government route means that investment in the capital of resident entities by non-resident entities can be made only with the prior approval of Government (FIPB, Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion.

Investment on repatriable basis means investment, the sale proceeds of which, net of taxes, are eligible to be repatriated out of India and the expression ‘investment on non-repatriable basis shall be construed accordingly. (Also, the process of converting foreign currency into currency of one’s own country)

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ENVIRONMENT PREVAILING DURING FERA

Traditionally Indian forex market has been a highly regulated one. Till about 1992-93, government exercised absolute control on the exchange rate, export-import policy, FDI (Foreign Direct Investment) policy. The Foreign Exchange Regulation Act (FERA) enacted in 1973, strictly controlled any activities in any remote way related to foreign exchange. FERA was introduced during 1973, when foreign exchange was a scarce commodity. Post-independence, union government’s socialistic way of managing business and the license raj made the Indian companies noncompetitive in the international market, leading to decline in export. Simultaneously India import bill because of capital goods, crude oil & petrol products increased the forex outgo leading to sever scarcity of foreign exchange. FERA was enacted so that all forex earnings by companies and residents have to reported and surrendered (immediately after receiving) to RBI (Reserve Bank of India) at a rate which was mandated by RBI.

FERA was given the real power by making “any violation of FERA was a criminal offense liable to imprisonment”. It professed a policy of “a person is guilty of forex violations unless he proves that he has not violated any norms of FERA”. To sum up, FERA prescribed a policy – “nothing (forex transactions) is permitted unless specifically mentioned in the act”.

Indian forex market since independence can be grouped in three distinct phases:

1947-1977During 1947 to 1971, India exchange rate system followed the par value system. RBI fixed rupee’s external par value at 4.15 grains of fine gold. 15.432grains of gold is equivalent to 1 gram of gold. RBI allowed the par value to fluctuate within the permitted margin of ±1 percent. With the breakdown of the Bretton Woods System in 1971 and the floatation of major currencies, the rupee was linked with Pound-Sterling. Since Pound-Sterling was fixed in terms of US dollar under the Smithsonian Agreement of 1971, the rupee also remained stable against dollar.

1978-1992During this period, exchange rate of the rupee was officially determined in terms of a weighted basket of currencies of India’s major trading partners. During this period, RBI set the rate by daily announcing the buying and selling rates to authorized dealers. In other words, RBI instructed authorized dealers to buy and sell foreign currency at the rate given by the RBI on daily basis. Hence exchange rate fluctuated but within a certain

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range. RBI managed the exchange rate in such a manner so that it primarily facilitated imports to India. The FERA Act was part of the exchange rate regulation practices followed by RBI.

India’s perennial trade deficit (imports being more than exports) widened during this period. By the beginning of 1991, Indian foreign exchange reserve had dwindled down to such a level that it could barely be sufficient for three-week’s worth of imports. During June 1991, India airlifted 67 tonnes of gold, pledged these with Union Bank of Switzerland and Bank of England, and raised US$ 605 millions to shore up its precarious forex reserve. At the height of the crisis, between 2nd and 4th June 1991, rupee was officially devalued by 19.5% from 20.5 to 24.5 to 1 US$. This crisis paved the path to the famed “liberalization program” of government of India to make rules and regulations pertaining to foreign trade, investment, public finance and exchange rate encompassing (including) a broad gamut (range) of economic activities more market oriented.

1992 onwards1992 marked a watershed in India’s economic condition. During this period, it was felt that India needs to have an integrated policy combining various aspects of trade, industry, foreign investment, exchange rate, public finance and the financial sector to create a market-oriented environment. Many policy changes were brought in covering different aspects of import-export, FDI, Foreign Portfolio Investment etc. One important policy changes pertinent to India’s forex exchange system was brought in -- rupees was made convertible on current account. As a part of new economic reforms initiated in 1991 rupee was made partly convertible from March 1992 under the “Liberalised Exchange Rate Management scheme in which 60 per cent of all receipts on current account (i.e., merchandise exports) could be converted freely into rupees at market determined exchange rate quoted by authorised dealers, while 40 per cent of them was to be surrendered to Reserve Bank of India at the officially fixed exchange rate. This paved to the path of foreign exchange payments/receipts to be converted at market-determined exchange rate. However, it is worthwhile to mention here that changes brought in by government of India to make the exchange rate market oriented have not happened in one big bang. This process has been gradual. Convertibility in current account means that individuals and companies have the freedom to buy or sell foreign currency on specific activities like foreign travel, medical expenses, college fees, as well as for payment/receipt related to export-import, interest payment/receipt, investment in foreign securities, business expenses etc. A related concept to this is the “convertibility in capital account”. Convertibility in capital account indicates that Indian people and business houses can freely convert rupee to any other currency to any extent and can invest in foreign assets like shares, real estate in foreign countries. Most importantly Indian banks can accept deposit in any currency.

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Even though the exchange rate has been market determined, from time to time RBI intervenes in spot and forward market, if it feels exchange rate has deviated too much.

NEED TO INTRODUCE FERA

FERA was introduced at a time when foreign exchange (FOREX) reserves of the country were low, FOREX being a scarce commodity.

FERA therefore proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI).

It regulated not only transactions in FOREX, but also all financial transactions with non-residents. FERA primarily prohibited all transactions, except to the extent permitted by general or specific permission by RBI.

OBJECTIVES OF FERAThe main objective of FERA 1973 was to consolidate and amend the law regulating:

• Certain payments;

• Dealings in foreign exchange and securities;

• Transactions, indirectly affecting foreign exchange;

• Import and export of currency, for the conservation of the foreign exchange resources of the country;

• Proper utilization of foreign exchange, so as to promote the economic development of the country.

The basic purpose of FERA was:

a) To help RBI in maintaining exchange rate stability.

b) To conserve precious foreign exchange.

c) To prevent/regulate foreign business in India.

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FERA ACT 1973The Foreign Exchange Regulation Act (FERA) was legislation passed by the Indian Parliament in 1973 by the government of Indira Gandhi and came into force with effect from January 1, 1974. FERA emphasized strict exchange control over everything that was specified, relating to foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency. Law violators were treated as criminal offenders. It aimed at minimizing dealings in foreign exchange and foreign securities.

Important features of FERA were:

RBI would authorize a person / company to deal in foreign exchange. It consisted of 81 sections (some were deleted in the 1993 Amendment of the

Act) of which 32 sections related to the operational part & the rest covered penal provisions, authority and powers of the concerned Enforcement Directorate.

RBI would authorize the dealers to do transact the Foreign Currencies, subject to review and RBI was given power to revoke (cancel) the authorization in case of non-compliancy.

RBI would authorize the persons as Money Changers who will convert the currency of one nation to 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 felt that he could not use the currency for that particular purpose, he would sell it to an authorized dealer within 30 days.

No person in India, without “permission from RBI” would make payments to a person resident outside India and receive any payment from a person from outside India.

No person except authorized by RBI would 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.

To sum up, in FERA “anything and everything” that had to do something with Foreign Exchange was regulated. The Experts called it a “Draconian Act” which hindered the growth and modernization of Indian Industries.

The Important aspect of FEMA, in contrast with FERA is that it facilitates Trade, while that of FERA was that it “prevented” misuse. The focus was shifted from Control to Management. FERA was introduced at a time when foreign exchange (Forex) reserves of the country were low, Forex being a scarce commodity. FERA therefore proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI).

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During 1970s, several international companies, including IBM and Unilever, had a presence in India. However, it was becoming increasingly difficult for them to operate effectively because of the Foreign Exchange Regulation Act (FERA). Under FERA, the country placed a cap on foreign equity participation at 40 percent, though the limit was higher for pharmaceutical companies. The newly elected government’s decision to become more insular and focus on promoting agriculture, rural and indigenous industries made the economy unsuitable for multinational companies (MNCs). Coca-Cola was India's leading soft drink until 1977 when it left India after a new government ordered the company to turn over its secret formula for Coca-Cola and reduce its equity stake as required under the Foreign Exchange Regulation Act (FERA). In 1993, the company (along with PepsiCo) returned after the introduction of India's Liberalization policy. Similarly, IBM, Mobil and Kodak were on the move of quitting India due to restrictions put by FERA.

WHY FERA WAS REPLACED

Foreign Exchange Regulation Act, 1973 (FERA) is gone with the year 1999. There was a general dislike for it for a variety of reasons. It conferred enormous powers on relatively junior officers of the Government. It proved ineffective despite all the sound and fury that it generated, because it could rarely reach the men behind the scene: It was mostly the small fry - the stooges - that suffered vicarious punishment.

FERA in its existing form became, therefore, increasingly incompatible with the change in economic policy in the early 1990s. While the need for sustained husbandry of foreign exchange was recognized, there was an outcry for a less aggressive and mellower enactment, couched in milder language. Thus, the Foreign Exchange Management Act, 1999 (FEMA) came into being.

Actually, FEMA came into existence on June 1, 2000 but FERA was provided a sunset clause of two years to enable the Enforcement Directorate (ED) to complete investigations into cases already detected by it for FERA violations before May 31, 2000.

The need for replacing FERA with FEMA was felt with the introduction of economic reforms in the country since FERA was considered to be quite rigorous and more in line with the period of extreme foreign exchange crisis of early 1970s but out of tune with the liberalized economic scenario of the 1990s.

Under FEMA, violation of foreign exchange rules has ceased to be a criminal offence and would now be treated as a civil offence and the ED would no longer have the power to arrest persons for such offences. Extreme cases of money laundering, drug trafficking and gun running would now be dealt with under the proposed new legislation aimed at curbing money laundering.

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As per the new dispensation, after 1st June 2000 the ED would have powers to search and seize foreign currencies, summon people and adjudicate and impose penalties. But the Directorate would not have powers to arrest or prosecute.

COMPARISON – FERA & FEMA

Sr. No DIFFERENCES FERA FEMA

1 PROVISIONS FERA consisted of 81 sections, and was more complex

FEMA is much simple, and consist of only 49 sections.

2

FEATURES Presumption of negative intention (Mens Rea ) and joining hands in offence (abatement) existed in FERA

These presumptions of Mens Rea and abatement have been excluded in FEMA

3

NEW TERMS IN FEMA

Terms like Capital Account Transaction, current Account Transaction, person, service etc. were not defined in FERA.

Terms like Capital Account Transaction, current account Transaction person, service etc., have been defined in detail in FEMA

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DEFINITION OF AUTHORIZED PERSON

Definition of "Authorized Person" in FERA was a narrow one [sec 2(b)]

The definition of Authorized person has been widened to include banks, money changes, off shore banking Units etc. [sec 2(c)]

5 MEANING OF "RESIDENT" AS COMPARED WITH INCOME TAX ACT.

There was a big difference in the definition of "Resident", under FERA, and Income Tax Act

The provision of FEMA, are in consistent with income Tax Act, in respect to the definition of term "Resident". Now the criteria of "In India for 182 days" to make a person resident has been brought under FEMA. Therefore a person who qualifies to be a non-resident under the income Tax Act, 1961 will also be considered a non-resident for the purposes of application of FEMA, but a

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person who is considered to be non-resident under FEMA may not necessarily be a non-resident under the Income Tax Act, for instance a business man going abroad and staying therefore a period of 182 days or more in a financial year will become a non-resident under FEMA.

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PUNISHMENT Any offence under FERA, was a criminal offence , punishable with imprisonment as per code of criminal procedure, 1973

Here, the offence is considered to be a civil offence only punishable with some amount of money as a penalty. Imprisonment is prescribed only when one fails to pay the penalty.

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QUANTUM OF PENALTY.

The monetary penalty payable under FERA, was nearly the five times the amount involved.

Under FEMA the quantum of penalty has been considerably decreased to three times the amount involved.

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APPEAL An appeal against the order of "Adjudicating office", before " Foreign Exchange Regulation Appellate Board went before High Court

The appellate authority under FEMA is the special Director (Appeals) Appeal against the order of Adjudicating Authorities and special Director (appeals) lies before "Appellate Tribunal for Foreign Exchange." An appeal from an order of Appellate Tribunal would lie to the High Court. (sec 17,18,35)

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RIGHT OF ASSISTANCE DURING LEGAL PROCEEDINGS.

FERA did not contain any express provision on the right of on impleaded person to take legal assistance

FEMA expressly recognizes the right of appellant to take assistance of legal practitioner or chartered accountant (32)

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POWER OF SEARCH AND SEIZE

FERA conferred wide powers on a police officer not below the rank of a Deputy Superintendent of Police to make a search

The scope and power of search and seizure has been curtailed to a great extent

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RELEVANT PROVISIONS WITH RESPECT TO FDI

Introduction to FDI

Foreign Direct Investment generally speaking refers to capital inflows from abroad that invest in businesses of the local economy. Such inflows are also preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. The main motivation to significantly influence or control an enterprise is the underlying factor that differentiates direct investment from portfolio investments. For the latter, the investor’s focus is mostly on earnings resulting from the acquisition and sale of shares and other securities.

Portfolio investors do not have as an objective any long-term relationship. Return on the assets is the main determinant for the purchase or sale of their securities. FDI unlike portfolio investment, are stickier in nature and less prone to moving out at the click of a mouse. The term foreign direct investment has acquired renewed significance after the reforms initiated by the Indian Government in 1991 although its presence is there right from the independence. Foreign Direct Investment has evolved in a phased manner showing its need, presence and importance for country like India.

Evolution

The first phase between 1948 and 1969 was characterized by a cautious welcome to foreign investment. During this phase foreign firms were encouraged to invest in protected industries. The second phase between 1969 and 1991 was marked by coming into force of Monopolies and Restrictive Trade Practices Commission (MRTP). Foreign Exchange Regulation Act was enacted in 1973 which limited the extent of foreign equity to 40%, though this limit could be raised to 74% for technology intensive, export intensive and core sector industries. The third and most revolutionary phase between 1991 and 2000 witnessed liberalization of FDI policy.

Foreign Investment Promotion Board (FIPB) was constituted to consider cases under government route (FDI in activities which require prior approval of the Government). The fourth and last phase from 2000 till date was the reflection of increasing globalization of Indian economy. All the activities except for negative list were placed under the automatic route (FDI in activities that do not require prior approval either of the Government or the RBI). The year 2010 saw the continuation of rationalization process. All the existing regulations on FDI were consolidated into a single document for ease of reference.

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Overview of FDI Policy in India & related Regulations

The FDI framework in India is regulated by three authorities namely (1) The Department of Industrial Policy and Promotion (DIPP) Ministry of Commerce & Industry, (2) The Reserve Bank of India (RBI), and (3) the Foreign Investment Promotion Board (FIPB), Ministry of Finance. While FDI policy is formulated and announced by the DIPP, the compliance part related to FDI is monitored by RBI and FIPB’s role is to grant approvals for the cases which require prior permission of the Central Government. The Circular on FDI, lays policy framework, general conditions on FDI, such as who can invest, entities into which FDI can be made, and sectors in which FDI is allowed under automatic route or approval route and the sectors which are prohibited for FDI. In case of conflict with FDI policy vis-a-vis FEMA, the FEMA notifications prevail over the FDI Policy.

There are certain sectors which are still prohibited for FDI such as Lottery business, gambling, chit funds, Nidhi company (principle of mutuality), trading in Transferable Development rights (TRDs), Real Estate business or construction of Farm Houses, manufacturing of cigars, cheroots and cigarettes, of tobacco or of tobacco substitutes, Atomic Energy, Railway Transport amongst others.

Entering India with the purpose of Foreign Direct Investment will require mainly adherence to FDI policy guidelines and provisions of FEMA. These provisions under FEMA are prescribed in a Notification titled as “Transfer or Issue of Security by a Person Resident outside India” Foreign Investments can be made by the non-residents through either Automatic route or Government route.

FDI Provisions

1. Following can invest under FDI

A person residing outside India or a non-resident entity (including foreign citizens/ Individuals/ NRIs)

A citizen of Pakistan or an entityincorporated in Pakistan

Under the Government route –other than defence, space &atomic energy, other prohibitedsectors under FDI

A citizen of Bangladesh or anentity incorporated in Bangladesh

Under the Government route

NRIs resident in Nepal andBhutan as well as citizens of Nepaland Bhutan

On repatriation basis, ifremittance received in free foreignexchange through normal

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banking channels

Erstwhile OCBs (Overseas Corporate Bodies)

Derecognized w.e.f. September 16,2003

Unincorporated entity outsideIndia

Not allowed to invest in India

Entities into which investments can be made

a. FDI in Indian company b. FDI in Partnership Firm / Proprietary Concern: a Non-resident India (NRI) or

Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm / proprietary concern on non-repatriation basis

c. FDI in Venture Capital Funds (VCF): Foreign venture Capital Investors (FVCIs) are allowed to invest in Indian venture Capital undertakings (IVCUs) / Venture Capital Funds (VCFs) / other companies.

If a domestic VCF is set up as trust, a person resident outside India either non-resident entity or individual including NRI, can invest in such VCF subject to approval of FIPB. However, if a domestic VCF is set up as an incorporated company then a person resident outside India can invest in such VCF under automatic route of FDI scheme.

d. FDI in trusts: FDI in trusts other than VCF is not permitted.e. FDI in LLP: Reserve Bank has included LLPs registered under Limited Liability

Partnership Act, 2008 as eligible entity to accept FDI. However, FDI in LLP is allowed through government approval route.

f. FDI in other entities: FDI in resident entities other than those mentioned above is not permitted.

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Types of instruments

Equity Shares

Fully, compulsorily & mandatorily convertible preference shares

Fully, compulsorily & mandatorily convertible debentures

Warrants

Upfront 25% of consideration Conversion in 18 months Upfront pricing/ conversion

formula

Non-convertible, optionally convertible or partially convertible considered as debt

To comply with ECB norms

Partly paid shares

Upfront 25% of consideration including premium

Full payment in 12 months

Differential voting rights shares as to dividend, voting or otherwise

Permitted

Optionality clauses:

Buy-back of securities at the price prevailing/value determined at the time of exercise of the optionality so as to enable the investor to exit without any assured return. Minimum lock-in period of one year.

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Modes of Payment

Inward remittance through normal banking channels. Debit to NRE / FCNR account of a person concerned maintained with an AD

category I bank. Conversion of royalty / lump sum / technical knowhow fee/ legitimate due for payment or conversion of ECB, shall be treated as consideration for issue of shares.

Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.

Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

Prohibited Sectors under FDI

FDI is prohibited in:

Lottery Business, including Government/private lottery, online lotteries, etc. Gambling and Betting, including casinos etc. Chit funds Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate Business or Construction of Farm Houses Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of

tobacco substitutes Activities/sectors not open to private sector investment e.g. (I) Atomic Energy

and (II) Railway operations.

Pricing Guidelines

The price of shares issued to the person resident outside India under the FDI Policy shall be not less than:

The price worked out in accordance with SEBI guidelines as applicable in case of a listed company.

The fair valuation of shares done as per any internationally accepted pricing methodology for valuation of shares on arms- length basis duly certified by a SEBI registered Merchant Banker or a Chartered Accountant in case of unlisted company. [The above is revised condition by RBI].

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In case a non-resident investor is making investment in an Indian company by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.

FDI Policy has gone through dramatic change inching towards more rationalized and liberalized approach for the development of country. This has narrowed down the instruments regulating the FDI Policy broadly to three main.

1. Equity caps (restricts foreign ownership of capital)

The FDI equity caps in a sector essentially reflect the levels of control that a Foreign Direct Investor is permitted to exercise in a company operating within that sector. The FDI policy incorporates equity caps at broadly four levels- 26%, 49%, 51% and 74%. These caps reflect ownership / control levels in a company.

2. Entry route (requiring prior government oversight, including screening and approval)

It relates to whether FDI can be brought in through ‘automatic route’ or ‘government route’ i.e. prior government approval required or not.

3. Conditionalities (comprise of operational restrictions/licensing conditions etc.)

It refers to sectorial conditions that must be fulfilled. Insurance, construction, NBFC, telecom etc. are some of the sectors for which conditionalities are prescribed.

FDI up to 100% under Automatic Route – Subject to conditions

Mining & exploration of metal and non-metal ores

Excluding titanium bearing minerals & its ores

Non-scheduled air transport, ground handling maintenance & repairs organizations

Ground handling subject to sectoral regulations and security clearance

Foreign investment in NBFC Allowed only for merchant banking, under writing, PMS, Investment Advisory, Financial consulting, Stock broking, Credit rating, housing finance, Leasing & financing

Pharmaceuticals GreenfieldAgriculture & Animal Husbandry Floriculture, horticulture,

apiculture & cultivation of vegetables & mushrooms under controlled conditions

Production of seeds and planting

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material Animal husbandry including

breeding of dogs, Pissiculture, aquaculture and other agro sector services

E-commerceOnly B2B ecommerce (not in retail trading)

Wholesale trading Would be permitted among companies of same group. WT to group companies taken together should not exceed 25% of the total turnover of the wholesale venture.

Construction Development (Includes development of townships, construction ofresidential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships)

No minimum land requirement for development of serviced plots which earlier was minimum 10 hectares.

Minimum capitalization requirement has been reduced down to USD 5 million which would be

Brought within six months of the commencement of project.

FDI up to specified sectoral cap under Automatic Route

Petroleum refining by the PSU, without any divestment or dilution of domestic equity in the existing PSUs

49%

Foreign Airlines allowed under the Government approval route up to the limit of 49% of their paid-up capital

49% FDI (100% for NRI’s)

Credit Information Companies

74% (FDI + FII/FPI)

Commodity Exchange 49% (FDI+ FII/FPI) Investment by Registered FII/FPI under Portfolio Investment Scheme will be limited to 23% and Investment under FDI Scheme

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limited to 26%Power exchange & Infrastructure companies in securities market namely stock exchanges, depositories and clearing corporations in compliance with SEBI regulations

49% (FDI+ FII/FPI)FDI limit of 26 per cent and anFII/FPI limit of 23 per cent ofthe paid-up capital

FDI up to 100% under Government Approval Route

Pharmaceuticals Brownfield (Govt. may incorporate appropriate conditions for FDI in brownfield cases at time of granting approval)

Financial ServicesForeign investment in other financial services, other than those indicated in FDI Policy, would require prior approval of the Government.

Tea Plantations Tea sector including tea plantations. Besides the above, FDI is not allowed in any other plantation sector/activity.

Print Media Publication of facsimile edition of foreign newspapers: from the owner of the original foreign newspapers

FDI up to specified sectoral cap under Government Approval Route

Multi Brand Retail Trading 51%Banking- Public Sector including State Bank of India and its associate Banks 20% (FDI and Portfolio Investment)Private Security Agencies 49%Manufacture of items reserved for production inMicro and Small Enterprises (MSEs)

Beyond 24% would require Govt. approval Subject to Industrial Licenseunder IDR Act

FDI up to specified sectoral cap under Automatic Route; thereafter under Government Approval Route

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Automatic up to 49% Government route beyond 49% and up to 74%

Teleports(Setting up of up-linking HUBs)Cable NetworksMobile TVSky Broadcasting services

100% Automatic Up to 49%Government route beyond 49%

Single Brand Product Retail trading

100% of paid-up capital of ARC(FDI+FII/FPI) Automatic Up to49% Government route beyond 49%

AssetReconstructionCompany (ARC)

74% including investment by FIIs/FPIs Automatic up to 49% Government route beyond 49% and up to 74%

Banking -PrivateSector

100% Automatic up to 49%Above 49% Government

Telecom Services(including TelecomInfrastructure Providers

74% FDI (l00% for NRIs) Automatic up to49% Government route beyond 49% and upto 74%

Non-Scheduled Air Transport Service and Ground handling subject to sectoral regulations and security clearance

Recent Government Initiatives in some key sectors

Press Notes have been issued by the DIPP for the most sensitive defense sector and prohibited railways Sector thereby relaxing / opening up of sector for foreign investment. As on 26th August 2014 DIPP has increased the percentage cap for FDI from 26 to 49% under government and above 49% to Cabinet Committee on Security (CCS) on case to case basis.

Similarly Cabinet cleared proposal which allowed 100% FDI in railway infrastructure. The cabinet decision has permitted FDI in railways sector for developing rail infrastructure in the country.

Union cabinet has also cleared a bill to raise foreign investment ceiling in private insurance companies from 26% to 49% with the provision that the management and control of the companies must be with the Indians.

Foreign Investment inflows are expected to increase by more than two times and cross USD 60 billion mark in FY15 as foreign investors start gaining confidence in India’s new government. Riding on the huge expectations from the new government, global investors are gung ho (enthusiastic & eager) on the Indian economy.

Reporting of FDI Inflow

Form Supporting Time Action Non-compliance

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period

Advance ReportingForm

FIRC/s evidencing receipt ofRemittance

KYC report onnon-residentinvestor

Not later than 30days from the date of receipt

Allotment ofUnique IdentificationNumber (UIN) forthe amountreported

Contravention under FEMA.

Attract penal provisions

Reporting of Issue of Fresh Shares /Bonus /Right Shares /ESOP/ Convertible Debentures / Convertible Preference Shares /Conversion of ECB/ Preoperative/Pre-incorporation Expenses/Legitimate dues

Form Supporting Time period

Action Non-compliance

Form FCGPRDuly filled up and signed byMD/Director/Secretary ofCompany

A certificate fromCompany Secretary of the company

A certificate from SEBI registered Merchant Banker or CharteredAccountant forValuation.

Not laterthan 30days fromthe date ofreceipt

Taking on recordthe shareholdingpattern

Contravention under FEMA.

Attract penal provisions

Time frame for issue of shares

Capital instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the Non-Resident Rupee (NRE)/Foreign Currency Non-Resident (FCNR) account

Else refunded to non-resident investor

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

File form FC-TRS with RBI through authorized dealer within 60 days of receipt of consideration

Indian companies are required to report the National Industrial Classification (NIC) Codes in the FCGPR and FCTRS forms as per the NIC 2008 version, henceforth.

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A uniform State and District code list for reporting of details of foreign direct investment by Indian companies in Form FCGPR. The list can be accessed on the RBI website (www.rbi.org.in - FEMA – State and District Code List).

EXTERNAL COMMERCIAL BORROWINGS (ECB) –IN CONTEXT OF FEMA

ECB’s

ECBs refer to commercial loans in the form of bank loans, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares), buyers’ credit, suppliers’ credit availed of from non-resident lenders with a minimum average maturity of 3 years.

Master Circular by RBI

External Commercial Borrowings and Trade Credits availed of by residents are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 3/ 2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, dated May 3, 2000, as amended from time to time.

This Master Circular consolidates the existing instructions on the subject of "External Commercial Borrowings and Trade Credits" at one place. The Authorized Persons and the Authorized Dealer Category – I banks may refer to respective circulars/ notifications for detailed information, if so needed.

This Master Circular is being updated from time to time as and when the fresh instructions are issued. The date up to which the Master Circular has been updated are suitably indicated.

ECB Can be in form of:

1. Foreign Currency Convertible Bonds (FCCBs) :- It refers to a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.

2. Preference shares: - (i.e. non-convertible, optionally convertible or partially convertible). These instruments are considered as debt and denominated in Rupees and rupee interest rate will be based on the swap equivalent of LIBOR plus spread.

3. Foreign Currency Exchangeable Bond (FCEB) :- FCEB is a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person

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who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible foreign currency.

Compliance with ECB Guidelines

The primary responsibility to ensure that ECB raised/utilized are in conformity with the ECB guidelines and the Reserve Bank regulations / directions is that of the borrower concerned and any contravention of the ECB guidelines will be viewed seriously and will invite penal action under FEMA 1999. The designated AD bank is also required to ensure that raising / utilization of ECB is in compliance with ECB guidelines at the time of certification.

ECB CAN BE ACCESSED BY 2 WAYS:

A. AUTOMATIC ROUTE

1. Access of funds under Automatic Route does not require RBI/GOI approval. Corporate including hotel, hospital, software sectors (registered under the Companies Act 1956) and Infrastructure Finance Companies (IFCs) except financial intermediaries such as banks, FIs, HFCs, and NBFCs are eligible to raise ECB. Units in SEZs are allowed to raise ECB for their captive requirements. NGOs engaged in micro finance activities are eligible to avail of ECB (subject to certain conditions). Trusts and Non-Profit making organizations are not eligible to raise ECB.

2. ECB can be raised by borrowers from internationally recognized sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC, etc.)/ Regional Financial Institutions and Government owned Development Financial Institutions, (iv) Export Credit Agencies, Foreign Equity Holders (other than erstwhile Overseas Corporate Bodies).

• Overseas organizations and individuals may provide ECB to NGOs engaged in micro-finance subject to complying with some safeguards outlined in the RBI circular.

Amount & Maturity

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Category Amt (USD )/PERUNIT /PER FY YEAR

Average Maturity

Corporate other than those in services sector viz. hotel, hospital, and software.

750 Mn. or equivalent *Upto USD 20 Mn. of equivalent in a financial year – 3 years (Can have put/call option) *Above USD 20 Mn. and upto 750 Mn. – 5 years

Corporate in service sector i.e. hotel, hospital, and software (Proceeds of ECBs should not be used for acquisition of Land)

Upto 200 Mn. or equivalent

-Same-

NGOs engaged in micro finance activities

10 Mn. or equivalent (Forex exposure to be fully hedged)

-Same-

All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

Average Maturity Period (All in cost over 6 Months LIBOR)

3 years up to 5 years – 350 bps

Above 5 years – 500 bps

Factors for which ECBs are raised

ECBs can be raised for investment (import of capital goods as classified by DGFT in Foreign Trade Policy (FTP)) in new projects, modernization/expansion of existing units in industrial and service sectors including infrastructure sector.

Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.

NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail ECBs including outstanding in existing ECBs up to 50% of their owned funds under Automatic Route for on lending to infrastructure sector and beyond 50% of owned funds under Approval Route.

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For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities, etc.

Restrictions

Utilization for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate, investment in real estate sector, for working capital, general corporate purpose and repayment of existing Rupee loans.

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, FIs and NBFCs from India relating to ECB.

The borrower has the option to offer security against the ECB. Creation of charge over immoveable assets and financial securities, such as shares, in favor of the overseas lender is subject to FEMA regulations and ECB guidelines.

B. APPROVAL ROUTE

Proposals falling under the category include:-

a) On lending by the EXIM Bank for specific purposes (case to case basis). b) Banks and financial institutions which had participated in the textile or steel

sector restructuring package as approved by the Government.c) ECB with minimum average maturity of 5 years by NBFC to finance import of

infrastructure equipment for leasing to infrastructure projects. d) Infrastructure Finance Companies (IFCs) i.e. NBFCs, categorized as IFCs, by

RBI (beyond 50% of their owned funds) for on-lending to the infrastructure sector as defined under the ECB policy and subject to compliance of certain stipulations.

e) Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies.f) Special Purpose Vehicles (SPV) or any other entity notified by the RBI, set up to

finance infrastructure companies / projects exclusively.g) Financially solvent Multi-State Co-operative Societies engaged in manufacturing. h) SEZ developers for providing infrastructure facilities within SEZ.i) Eligible Corporate under automatic route other than in the services sector viz.

hotels, hospitals and software sector can avail of ECB beyond USD 750 million per financial year

j) Corporate in the service sector for availing ECB beyond USD 200 Million per financial year.

k) Cases falling outside the purview of the automatic route limits and maturity indicated, etc. ECB can be availed from the recognized lenders as explained under Automatic Route.

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Amount and Maturity

• 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 or equivalent per financial year.

• Corporate in the service sector beyond ECB 200 Mn. for permissible end-uses.

ECB’s raised through Approval Route

End-use would be the same for the funds raised under Automatic Route.

• The payment by eligible borrowers in the Telecom sector, for spectrum allocation may, initially, be met out of Rupee resources by the successful bidders, to be refinanced with a 5 long-term ECB, under the approval route, subject to certain conditions outlined in the Circular.

Restrictions are same as under ‘Automatic Route “

Take-out finance through ECBs

Existing guidelines do not permit refinancing of domestic Rupee Loans with ECB with the exception of infrastructure sector for which Take-out financing through ECB is presently available to eligible corporate borrowers who availed Rupee Loans from domestic banks for development of new projects in sea port and airport, roads including bridges and power sectors.

The Scheme is subject to certain conditions viz. a) The borrower should have a tripartite agreement with domestic banks and

overseas recognized lenders for either a conditional or unconditional take-out of the loan within three years of the scheduled Commercial Operation Date (COD). The scheduled date of occurrence of the take-out should be clearly mentioned in the agreement.

b) The loan should have a minimum average maturity period of seven years. c) The domestic bank financing the infrastructure project should comply with the

extent prudential norms relating to take-out financing. d) The fee payable, if any, to the overseas lender until the take-out shall not exceed 100 bps per annum

e) On take-out, the residual loan agreed to be taken- out by the overseas lender would be considered as ECB and the loan should be designated in a convertible foreign currency and all extent norms relating to ECB should be complied with.f) Domestic banks / Financial Institutions will not be permitted to guarantee the take-out finance, etc.

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Compliance with ECB Guidelines

The primary responsibility rests with the borrower as regards and ECB raised/utilized and they are in conformity with the ECB guidelines/RBI regulations/directions. Any contravention of these would attract penal action under FEMA.

FEMA REGULATIONS RELATING TO EXPORTS, IMPORTS I. EXPORT OF GOODS & SERVICES

RBI has notified FEMA (Export of Goods and Services) Regulations, 2000 (the ‘Export Regulations’) vide Notification No. FEMA 23/2000-RB dated May 3, 2000

Has to comply with Trade Policy (Foreign Trade Policy 2009-14) DGFT role

Declaration

EDF/SDF Exemption for certain categories Waiver from declaration – AD’s powers ACU mechanism for ACU countries Third party payments for export / import transactions

Invoicing & realizing Export proceeds

Invoicing: in freely convertible currency or in Indian Rupees but Realization: in freely convertible currency However, export proceeds against specific exports may also be realized in

Rupees provided it is through a freely convertible Vostro account of a non-resident bank

Realization and Repatriation of proceeds

Exporter to realize within a stipulated period of 9 months (for all exporters including SEZ, EOUs, STP, EHTP & Status holders)from the date of export:

Within 15 months from the Date of sale in r/o Goods exported to a warehouse established outside India (As soon as it is realized).

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Setting up of Offices Abroad and Acquisition of Immovable Property for Overseas Offices

i. Initial expenses: up to 15% of the average sales/income p.a. or turnover during the last two financial years or up to 25% of the NW, whichever is higher.

ii. Recurring expenses: up to 10% , may be sent for the purpose of normal business operations of the office (trading / non-trading) / branch or representative office outside India s/t conditions:

The overseas branch/office has been set up or representative is posted for conducting normal business activities of Indian entity

The overseas branch/office/representative shall not enter into any contract or agreement in contravention of the Act, Rules or Regulations made there under

Offices Abroad

It should not create any financial liabilities, contingent or otherwise, for the HO in India and also not invest surplus funds abroad without prior approval of the Reserve Bank. Any funds rendered surplus should be repatriated to India.

The details of bank accounts opened in the overseas country should be promptly reported to the AD Bank.

Such approved remittances can also be for acquisition of immovable property outside India for its business and for residential purpose of its staff.

The overseas office / branch of software exporter company/firm may repatriate to India 100 per cent of the contract value of each ‘off-site’ contract.

In case of ‘on site’ contracts, they should repatriate the profits of ‘on site’ contracts after the completion.

Advance Payments against Exports

The shipment of goods is made within one year from the date of receipt of advance payment

The Rate of Interest, if any, payable on the advance is not more than LIBOR + 100 bps

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The documents are routed through the AD bank through whom the advance is received

No remittance towards refund of unutilized portion of advance payment or towards payment of interest, shall be made after the expiry of one year, without the prior approval of the RBI.

Long term export advance

Exporters having a min. of 3 years satisfactory track record can receive long term export advance (up to 10 years max.) to be utilized for execution of long term supply contracts for export subject to conditions:

1. Firm irrevocable supply orders and contracts should be in place - at prevailing international pricing.

2. Company should have capacity, systems and processes - that the orders over the said tenure can actually be executed.

3. Only to those entities, who have not come under the adverse notice of ED or have not been caution listed.

4. The Rate of interest payable, should not exceed LlBOR plus 200 basis points. 5. The documents should be routed through one AD bank only. AD should ensure

compliance with AML / KYC guidelines. 6. Cannot be used to liquidate Rupee loans classified as NPA.

Export advance

BG/SBLC for Export Performance – 2 years at a time and rolled over for another 2 years – not more than the value of advance on reducing balance basis. No discounting of this L/C by branch of Indian bank abroad.

Advance Payment received for more than one year subject to certain conditions – Bonafides, KYC/AML, not more than LIBOR +100 bps, no refund > 10%., no refund without RBI approval

Trade Fairs Exhibitions abroad

EDF/SDF to be approved by ADs, certain conditions to be complied with –export for display, can sell abroad, can sell at discount and also could gift up to $5000 per exporter

Bill of Exchange for re-import within one month of import Repatriation of sale proceeds, report to AD

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EDF/SDF approval for Export of Goods for re-imports Re-import after repairs / maintenance / testing / calibration Certificate of destruction during testing in lieu of Bill of Exchange

Part Drawing/Undrawn balances

Due to differences in weight, quality, etc., to be ascertained after arrival and inspection, weighing or analysis.

Maximum of 10 % of the full export value. Undertake on EDF that he would realize within the prescribed period of

realization AD to ensure that at least 90% or drawn amount is realized and one year has

lapsed

Consignment exports

AD instructs correspondent bank to deliver shipping docs against Trust Receipt/undertaking that sale proceeds would be paid within the period for realization

Consignee to Render account sales; Deductions should be supported by bills/receipts in original

In case the goods are exported on consignment basis, freight and marine insurance must be arranged in India.

Opening / Hiring of Ware houses abroad

AD permits on application for one year, renewable subject to conditions Applicant’s export outstanding does not exceed 5 per cent of exports made

during the previous financial year. Applicant has a minimum export turnover of USD 100,000/- during the last

financial year. All transactions should be routed through the designated branch of the AD Banks

and realized within the prescribed period.

Direct dispatch by Exporter

AD dispatches to overseas buyers/correspondent Occasionally to agents/consignees provided there is ILC, or full advance

payment and agreement contains a clause

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Based on standing and track record of exporter and Bank is satisfied that arrangements have been made for realization. SHE/SEZ can directly dispatch s/to conditions.

The duplicate copy of the EDF/SDF form is submitted to the AD banks for monitoring purposes, by the exporters within 21 days from the date of shipment of export

The export proceeds are repatriated through the AD banks named in the EDF/SDF Form.

AD may regularize cases of dispatch of shipping documents by the exporter direct to the consignee or his agent resident in the country of the final destination of goods, up to USD 1 million, per export shipment, subject to the following conditions:

The export proceeds have been realized in full. The exporter is a regular customer of AD bank for a period of at least six

months. The exporter’s account with the AD bank is fully compliant with the Reserve

Bank’s extant KYC / AML guidelines. The AD bank is satisfied about the bona-fides of the transaction. In case of doubt, the AD bank may consider filing Suspicious Transaction Report

(STR) with FIU_IND (Financial Intelligence Unit in India).

Counter-Trade Arrangement

Adjustment of value of goods imported into India against value of goods exported from India, voluntarily entered into with overseas supplier

Through an Escrow Account opened in India in US Dollar will be considered by RBI

All imports and exports under the arrangement should be at international prices in conformity with the Foreign Trade Policy and Foreign Exchange Management Act, 1999 and the Rules and Regulations made there under.

No fund based/or non-fund based facilities would be permitted against the balances in the Escrow Account.

Application for permission for opening an Escrow Account may be made by the overseas exporter / organization through his / their AD bank to the Regional Office, Reserve Bank.

For Romania: Indian exporter should utilize the funds for import of goods from Romania into India within six months from the date of credit to Escrow Accounts.

1. Invoicing of Software Exports – SOFTEX FORMS2. Short/Shut-out Ship3. Project Exports and Service ExportRBI approval cases• Export of Goods on Lease, Hire, etc.

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• Export on Elongated Credit Terms• AD approval: Export of goods by Special Economic Zones (SEZs)

II. IMPORTS OF GOODS & SERVICES

Imports – General provisions

Import regulated by FTP, DGFT, GOI, RBI. ADs need not obtain any document, including Form A-1, except a simple letter

from the applicant containing the basic information, as long as the exchange being purchased is for a current account transaction (not in Sch I & II) when the amount does not exceed USD 5,000 and the payment is made by cheque drawn on the applicant's bank or by a Demand Draft.

Form A-1 for import remittances

Applications by persons, firms and companies for making payments, exceeding USD 5000 or its equivalent, towards imports into India must be made in Form A-1.

ADs may freely open L/Cs and allow remittances for import. (Except for goods in negative list)

‘For Exchange Control purposes’ copy of the License should be called for & after effecting remittances banks may preserve the copies of utilized licenses till they are verified by the internal auditors or inspectors.

Obligations of purchaser of FX

In terms of Section 10(6) of the FEMA, 1999 the person acquiring foreign exchange is permitted to use it either for the purpose mentioned in the declaration made by him to AD or to use it for any other permissible purpose.

Where foreign exchange acquired has been utilized for import of goods into India, AD should ensure that the importer furnishes evidence viz., Exchange Control Copy of the Bill of Entry, Postal Appraisal Form or Customs Assessment Certificate, etc., and satisfy himself that goods have been imported.

In addition to the permitted methods of payment for imports, payment for import can also be made by way of credit to non-resident Rupee account of the overseas exporter maintained with a bank in India.

Time Limit for Settlement of Imports

Remittances against imports should be completed within six months from the date of shipment, except where amounts are withheld towards guarantee of performance, etc.

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AD banks may permit settlement of import dues delayed due to disputes, financial difficulties, etc. Interest in respect of delayed payments, usance bills or overdue interest for a period of less than three years from the date of shipment.

Time Limit for Deferred Payment Arrangements – Trade Credit guidelines – under ECB

No Time Limit for Import of Books.

Import of Foreign Exchange into India

Any amount of foreign exchange can be brought into India, subject to declaring it in the CDF to the Custom Authorities at the Airport. No CDF if the amount TC/Cy <= $10000, and/or the aggregate value of foreign currency notes (cash portion) alone brought in by such person at any one time does not exceed USD 5,000.

Import of Indian Currency and Currency Notes Any person resident in India who had gone out of India on a temporary visit, may

bring into India at the time of his return from any place outside India, Indian currency notes up to an amount Rs.10, 000/- per person.

A person may bring into India from Nepal or Bhutan, currency notes of denominations of less than Rs.100 only.

Third Party Payment for Import Transactions

AD banks are allowed to make payments to a third party for import of goods, subject to conditions:

Firm irrevocable purchase order / tripartite agreement should be in place. However 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.

AD bank should be satisfied with the bonafides of the transactions and should consider the Financial Action Task Force (FATF) statement before handling the transactions

The Invoice & B/E should contain a narration that the related payment has to be made to the (named) third party

Importer should comply with the extant instructions relating to imports including those on advance payment being made for import of goods.

Advance Remittance

1. AD may allow advance remittance for import of goods without any ceiling subject to conditions:

If the amount of advance remittance exceeds USD 200,000 or its equivalent, an unconditional, ISBLC or a guarantee from an international

31

bank of repute situated outside India or a guarantee of an AD bank India, if such a guarantee is issued against the counter-guarantee of an international bank of repute situated outside India, is obtained.

In cases where the importer (other than a Public Sector Company or a Department/Undertaking of the Government of India/State Government/s) is unable to obtain bank guarantee from overseas suppliers and the AD is satisfied about the track record and bonafides of the importer, the requirement of the bank guarantee / standby Letter of Credit may not be insisted upon for advance remittances up to USD 5,000,000.

AD may frame their own internal guidelines to deal with such cases as per a suitable policy framed by the bank's Board of Directors.

A Public Sector Company or a department of the GOI / State Government/s which is not in a position to obtain a guarantee from an international bank of repute against an advance payment, is required to obtain a specific waiver for the bank guarantee from the Ministry of Finance, GOI before making advance remittance exceeding USD 100,000.

2. All payments towards advance remittance for imports shall be subject to the specified conditions.

AR for the Import of Services

AD bank may allow remittance for import of services without any ceiling subject to the following conditions:

a) Where the advance is >USD 500,000 or its equivalent, guarantee from a bank of international repute situated outside India, or a guarantee from an AD in India, if such a guarantee is issued against the counter-guarantee of a bank of international repute procured by supplier.

b) Usual restriction for PSU, for AR > $100000 without BG. – Ministry of Finance approval.

c) AD should also follow-up to ensure beneficiary of the advance remittance fulfils his obligation under the agreement with the remitter in India, failing which, the amount should be repatriated to India.

Interest on Import Bills

1) AD bank may allow payment of interest on usance bills or overdue interest for a period of less than three years from the date of shipment at the rate prescribed for trade credit from time to time.

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2) In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance at the rate at which interest has been claimed or LIBOR, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances

may be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency.

Remittances/Guarantees against Replacement Imports

Where goods are short-supplied, damaged, short-landed or lost in transit and the EC Copy of the import license has already been utilized to cover the opening of LC against the original goods which have been lost, the original endorsement to the extent of the value of the lost goods may be cancelled by AD and fresh remittance for replacement allowed, provided, the insurance claim relating to the lost goods has been settled in favor of the importer. It may be ensured that the consignment being replaced is shipped within the validity period of the license.

In case replacement goods for defective import are being sent by the overseas supplier before the defective goods imported earlier are reshipped out of India, AD may issue Guarantees for dispatch/return of the defective goods, according to their commercial judgment.

Receipt of Import Bills/Documents

Import of Equipment by Business Process Outsourcing (BPO) Companies for their Overseas Sites – ICCs

Receipt of Import Bills/Documents Import bills and documents should be received from the banker of the supplier by

the banker of the importer in India. AD should not, therefore, make remittances where import bills have been received directly by the importers, except in the following cases:Receipt of import documents by the importer directly from overseas suppliers

1) Where the value of import bill does not exceed USD 300,000. 2) Import bills received by wholly-owned Indian subsidiaries of foreign

companies from their principals. 3) Import bills received by SHE as defined in the FTP, 100% EOU/ Units in

SEZ, PSUs/ and Limited Companies. Sector specific measure: AD permitted to allow remittance for imports up to USD

300,000 where the importer of rough diamonds, rough precious and semi-precious stones has received the import bills / documents directly from the overseas supplier and the d/e import is submitted by the importer at the time of remittance. Subject to conditions: Receipt of import documents by the importer directly/by AD directly

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1) The import would be subject to the prevailing FTP. 2) The transactions are based on their commercial judgment and they are

satisfied about the bonafides of the transactions. 3) AD should do the KYC and due diligence exercise and should be fully

satisfied about the financial standing / status and track record of the importer customer.

Before extending the facility, they should also obtain a report on each individual overseas supplier from the overseas banker or reputed overseas credit rating agency.

Receipt of import documents by the AD directly from overseas suppliers 1) At the request of importer, provided the AD is fully satisfied about the

financial standing/status and track record of the importer customer. 2) Before extending the facility, the AD should obtain a report on each

individual overseas supplier from the overseas banker/reputed overseas credit agency. However, such credit report on the overseas supplier need not be obtained in cases where the invoice value does not exceed USD 300,000 provided the AD is satisfied about the bonafides of the transaction and track record of the importer.

Evidence of Import - Physical Imports

If Rem. exceeds USD 100,000 or its equivalent, it is obligatory on the part of the AD to ensure that the importer submits:

a) EC copy of B/E for home consumption, or b) EC copy B/E for warehousing, in case of 100% EOU/ or c) Customs Assessment Certificate or Postal Appraisal Form, as declared by

the importer to the Customs Authorities, where import has been made by post, as evidence that the goods for which the payment was made have actually been imported into India.

For imports on D/A basis, AD should insist on production of evidence when effecting remittance. However, if importers fail to produce documentary evidence due to genuine reasons such as non- arrival of consignment, delay in delivery/ customs clearance of consignment, etc., AD may, if satisfied, allow reasonable time, up to 3 months from the date of remittance, to the importer.

Evidence in Lieu of Bill of Entry

AD may accept, in lieu of EC copy B/E, a certificate from the CEO or auditor of the company that the goods for which Rem. was made, have actually been imported into India provided:-

(a) The amount of foreign exchange remitted is less than USD 1,000,000.

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(b) The importer is a company listed on a stock exchange in India and whose net worth is not less than Rs.100 crores as on the date of its last audited balance sheet, or, the importer is a public sector company or an undertaking of the Government of India or its departments.

The above facility may also be extended to autonomous bodies, including scientific bodies/academic institutions, such as IISc/IITs whose accounts are audited by CAG. AD to insist on a declaration from the auditor/CEO to this effect.

Non-physical Imports, Issue of Acknowledgement And Verification and Preservation

Software or data through internet / data com channels and drawings and designs through e-mail / fax, a certificate from a CA that it has been received by the importer, may be obtained.

AD should advise importers to keep Customs Authorities informed of the imports made by them under this clause.

AD should acknowledge receipt of evidence of import e.g. EC copy B/E, Postal Appraisal Form or Customs Assessment Certificate, etc., from importers by issuing acknowledgement slips containing all relevant particulars relating to the import transactions.

Internal inspectors or auditors (including external auditors appointed by AD) should carry out verification of the documents evidencing import.

D/e for import should be preserved by AD for a period of one year from the date of its verification. In respect of cases which are under investigation, till it is complete.

Follow-up for Import Evidence

1) Evidence of import for > $100000, within 3 months from date of remittance, AD to rigorously follow-up for the next 3 months.

2) AD should forward a statement on half-yearly basis as at the end of June & December of every year, in form BEF furnishing details of import transactions, to the Regional Office of Reserve Bank under whose jurisdiction the AD is functioning, within 15 days from the close of the half-year to which the statement relates.

3) AD need not follow up submission of evidence of import involving amount of USD 100,000 or less provided they are satisfied about the genuineness of the transaction and the bonafides of the remitter. A suitable policy may be framed by the bank's Board of Directors and AD may set their own internal guidelines to deal with such cases.

Merchanting Trade

In Merchanting Trade following conditions should be satisfied:

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Goods acquired should not enter the Domestic Tariff Area and The goods should not undergo any transformation. AD may handle bonafide MT Transactions and ensure that:

All regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with.

Both the legs of a Merchanting Trade Transaction are routed through the same AD. The bank should verify the documents like invoice, packing list, transport

documents and insurance documents (if originals are not available, Non-negotiable copies duly authenticated by the bank handling documents may be taken) and satisfy itself about the genuineness of the trade.

The entire Merchanting 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.

The commencement of Merchanting 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.

Short-term credit either by way of suppliers' credit or buyers' credit will be available for MT transactions, to the extent not backed by advance remittance for the export leg, including the discounting of export leg LC by an AD bank, as in the case of import transactions.

In case advance against the export leg is received by the Merchanting Trader, AD bank should ensure that the same is earmarked for making payment for the respective import leg. However, AD bank may allow short-term deployment of such funds for the intervening period in an interest bearing account.

Merchanting Traders may be allowed to make advance payment for the import leg on demand made by the overseas seller. In case where inward remittance from the overseas buyer is not received before the outward remittance to the overseas supplier, AD bank may handle such transactions by providing facility based on commercial judgment. It may, however, be ensured that any such advance payment for the import leg beyond USD 200,000/- per transaction, the same should be paid against Bank Guarantee / LC from an international bank of repute, except in cases and to the extent where payment for export leg has been received in advance

Letter of Credit to the supplier is permitted against confirmed export order keeping in view the outlay and completion of the transaction within nine months

Payment for import leg may also be allowed to be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the Merchant Trader.

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AD bank should ensure one-to-one matching in case of each Merchanting Trade transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI, on half yearly basis within 15 days from the close of each half year, i.e. June and December.

The names of defaulting Merchanting Traders, where outstanding reaches 5% of their annual export earnings, would be Caution-listed.

The KYC and AML guidelines should be observed by the AD bank. 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. AD banks should satisfy themselves about the capabilities of the Merchanting Trader to perform the obligations under the order. The overall Merchanting Trade should result in reasonable profits to the Merchanting Trader.

STATISTICS

CRUDE OIL

37

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Crude Oil

Year

Price

GOLD

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

0

5000

10000

15000

20000

25000

30000

35000

Gold

Year

Price

SENSEX

38

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

0

5000

10000

15000

20000

25000

30000

OpenCloseAxis Title

USD INR

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

0

10

20

30

40

50

60

70

USD - INRINR

FDI

39

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

FDI In Crores

FII

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

-100000

-50000

0

50000

100000

150000

200000

FII

40

RIDDHI-SIDDHI BULLION CASE

Riddhi Siddhi Bullion Ltd (RSBL), a city-based bullion trader, has come under the

scanner of Enforcement Directorate (ED) for alleged violation of gold export-import

norms of the Reserve Bank of India.

The development comes at a time when RSBL is fighting a legal battle over Rs 100-

crore penalty, imposed by the Directorate General of Foreign Trade (DGFT), for not

adhering to the RBI's export rule.

"We have initiated an open inquiry against RSBL under Foreign Exchange Management

Act (FEMA). We have sought the documents of RSBL's customs entry and transaction

details with banks from the departments concerned," an ED official told DNA.

"Prima facie it seems to be forex violation; we are going through the book of entries and

transactions made by the company," said the official.

When contacted, a RSBL spokesperson said, "It is not right to comment at this point as

the case is sub-judice. On the ED's open inquiry, the company has not received any

kind of communication."

According to DGFT officials, the RSBL has violated the Nominated Agency Certificate

(NAC) norms as well as the RBI circular dated July 22, 2013. As per the circular, bullion

traders have to export the entire amount of gold imported by them after adding value

that is making jewelry.

While RSBL imported 550 kg gold, it shipped only 350 kg. Remaining 200 kg was

supplied to the domestic market. The show-cause notice issued last October stated that

RSBL's request for renewal of NAC for fiscal 2015 could not be considered as it had not

complied with the conditions.

41

However, soon after the notice was issued, RSBL got relief from the Bombay High

Court, which stayed the DGFT's order. RSBL also claimed it had no prior information

about the new norms of RBI, at the time of the import order.

Two months after the DGFT imposed the penalty, RSBL filed a defamation suit of Rs

500 crore against the agency's officer for maligning the trading house's image.

DNA has learnt that the NAC is renewed every year based on the validity of the status

certificate, the performance of the agency and annual returns.

According to the DGFT officials, when RSBL applied for renewal of the NAC for 2014-

15, it was observed that the statement submitted by the company did not contain bill of

entry-wise details of imports and supplies.

Therefore, RSBL certificate was not renewed.

42