C.V.O. Chartered & Cost Accountants' Association

Legal Updates

FEMA update

Compiled by : Shri Manoj C. Shah (C.A.)

SUMMARY OF RECENT RBI -A.P.(DIR Series) Circulars & Notifications

1. Circular No.21 dated February 13, 2002

Re: Two way fungibility of ADRs/GDRs

This circular is in reference to FEMA Notification No.20 dated May 3, 2000 and FEMA Notification No.41 dated March 2, 2001, which have laid down the enabling provisions for the operation of two-way fungibility.

The circular describes the Operative guidelines for the limited two-way fungibility under the 'Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993'

2. Circular No.22 dated February 14, 2002

Re: Exim Bank's line of Credit of USD 5 Million to Eastern and Southern African Trade and Development Bank (PTA Bank)

EXIM Bank has concluded an agreement with Eastern and Southern African Trade and Development Bank (PTA Bank) on November 12, 2001 making available to the latter, a line of credit upto an aggregate sum of USD 5 million.

The credit has become effective from December 12, 2001 and is available for financing Indian export of eligible goods and related services to buyers in the PTA Bank Member Countries, viz. Barundi, Comoros, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Malawi, Mauritius, Rwanda, Somalia, Sudan, Tanzania, Uganda, Zambia and Zimbabwe. The eligible goods will also include initial spares, drawings and designs together with services related thereto. The export of goods from India and their import into the borrowers' countries shall be subject to the laws and regulations in force in the concerned countries.

The Circular also specifies the broad terms and conditions of the credit. Annexure to the Circular lists out the goods eligible for finance out of the credit.

3. Circular No.23 dated February 19, 2002

Re: Indian Direct Investment outside India

This circular is in reference to FEMA Notification No.19 dated May 3, 2000 - Transfer or Issue of any Foreign Security Regulations 2001.

Regulation 6 of the above notification permits to make direct investment in Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India to Indian Parties. This regulation gives a general permission subject to the conditions specified in Sub regulation (2).

In this connection, it is now clarified that the general permission under regulation 6 does not include investment proposals which envisage / involves setting up a holding company or a Special Purpose Vehicle Abroad, which would in turn set up one or more step down subsidiaries as operating units. Thus any overseas investment proposals through two-tier structure, as explained above would require prior approval and permission of the Reserve Bank

In terms of clause (v) of sub-regulation (2) of Regulation 6, Indian parties included in the Reserve Bank's Caution List are not eligible to make overseas investments under the automatic route. This restriction is now also applicable to Indian parties which are defaulters to the banking system in India and whose names appear in Defaulters List published/ circulated by the Reserve Bank. Such parties should apply to the Reserve Bank for prior permission for the overseas investment.

4. Circular No.25 dated March 1, 2002

Re: Setting up of Chairs in Educational Institutions outside India

The Circular allows Indian corporate with proven track record to contribute funds from their foreign exchange earnings for setting up chairs in educational institutions abroad, and for other welfare measures, which are likely to benefit community outside India. RBI will consider such cases on case to case basis.

Authorised dealers may forward all such applications to RBI with (a) Details of their foreign exchange earnings during the last 3 years (b) Brief background of the company's track record and (c) Brief details of the chair proposed to be set up in the educational institution /welfare measures to be funded and its likely benefits

5. Circular No.26 dated March 1, 2002

Re: External Commercial Borrowings (ECBs)- Prepayment out of EEFC Accounts.

RBI approves on application from corporate borrowers to prepay their ECBs to the extent of the balances in their EEFC Accounts. In terms of Notification No 30 dated 17-11-2000, Corporates who are EOU and others can credit upto 70% and 50% of their foreign exchange earnings to their EEFC accounts, respectively.

This circular now allows Corporates to credit higher than above percentages of export proceeds to their EEFC account with approval from RBI on case to case basis to take advantage of lower interest rates and prepay the ECBs.

Notifications

1. Fema Notification No.47 dated December 5, 2001

Re: Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) (Second Amendment) Regulations 2001

This Notification partially modifies the Notification No.10 - Foreign Currency Accounts by a person resident in India.

In regulation 7 (Opening, holding and maintaining Foreign Currency Accounts outside India), sub regulation 4A is proposed to be inserted. This sub-regulation 4A permits, A firm or a company or a body corporate registered or incorporated in India (the Indian entity) for opening, holding and maintaining in the name of its office (trading or non trading) or its branch set up outside India or its representative posted outside India, a foreign currency account with a bank outside India by making remittances from India for the purpose of normal business operations of the office / branch or representative.

This facility is subject to the conditions such as Actual opening of the branch / office or posting representative outside India, cap on total remittances that can be sent from India, prohibition on entering in any contract or agreement by overseas branch / office / representative in contravention of rules / regulations made thereunder.

It also lists down the situations in which the account shall be closed.

2. Fema Notification No. 52 dated March 1, 2001

Re: Foreign Exchange Management (Deposit) (Amendment) Regulations 2002

This Notification notifies that no deposit or renewal of existing deposit shall be accepted under the NRNR Account or the NRSR Account. The existing deposits under the NRNR Account and the existing account in the form of term deposits of NRSR account may be continued until the date of maturity.

On Maturity of the deposits under the NRNR account, the maturity proceeds will be credited to the account holders NRE account. While in case of deposits under NRSR account the maturity proceeds will be credited to the accountholders NRO account.

The existing NRSR account will be continued only upto 30 September 2002 and the balance therein then will be credited to the account holders NRO account or will have to be closed at the option of the accountholder.

The circular further states that no NRNR or NRSR account shall be opened on or from 1st April 2002, whether by renewal of existing deposit or otherwise.

3. Fema Notification No. 53 dated March 1,2001

Re: Foreign Exchange Management (Transfer or Issue of any foreign security) (Third Amendment) Regulations 2002

Regulation 6 (Permission for direct investment in certain cases) permits an Indian party to make direct investment in a joint venture or wholly owned subsidiary outside India to the extent that the total financial commitment of the Indian party doesn't exceed US $ 50 million or its equivalent in any one financial year, except for investment in Nepal, Bhutan and Pakistan. Investment under this regulation can be funded by drawal of foreign exchange from an AD in India to the extent of 25% of the networth of the Indian party as on the date of last audited balance sheet.

This Notification now increases the limit of direct investment by the Indian party from US $ 50 million to US $ 100 million. This notification now also permits drawal of foreign exchange from an AD in India to the extent of 50% of the networth of the Indian party as on the date of last audited balance sheet.

 

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Vol.5 No. 4 mar. - Apr. 2002