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RESERVE BANK OF INDIA (RBI)

1. Foreign Direct Investment (FDI) in India – Issue of equity shares under the FDI Scheme against legitimate dues: An Indian company under the automatic route may issue shares/convertible debentures to a person resident outside India against lump-sum technical know-how fee, royalty External Commercial Borrowings (ECBs) (other than import dues deemed as ECB or Trade Credit as per RBI guidelines) and import payables of capital goods by units in Special Economic Zones subject to certain conditions like entry route, sectoral cap, pricing guidelines and compliance with the applicable tax laws. RBI has vide its circular RBI/2014-15/234 A.P. (DIR Series) Circular No.31 dated September 17, 2014 notified that the extant guidelines for issue of shares/convertible debentures under the automatic route have been reviewed in consultation with the Government of India and, accordingly, decided to permit issue of equity shares against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA, 1999 or any rules/ regulations framed or directions issued there under, provided that:
  1. The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc. as amended by Reserve bank of India, from time to time;
  2. The issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes.
  All the other conditions for issuance of equity shares under the automatic route and Government approval route shall remain unchanged. 2. Risk Management and Inter Bank Dealings: Hedging Facilities for Foreign Portfolio Investors (FPIs) Under the extant FEMA regulations, Foreign Portfolio Investors (FPIs) are allowed to approach any Authorized Dealer Category I bank for hedging their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date subject to certain conditions as specified in A.P. (DIR Series) Circular No. 32 dated December 28, 2010 as amended from time to time. RBI has vide its notification RBI/2014-15/216 A.P. (DIR Series) Circular No.28 dated September 8, 2014 notified that in order to enhance the hedging facilities for the FPIs holding securities under the Portfolio Investment Scheme (PIS) in terms of schedules 2, 2A, 5, and 8 of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA 20 /2000-RB dated 3rd May 2000) as amended from time to time, as announced in the Monetary Policy Statement of April 1, 2014, it has been decided to permit FPIs to hedge the coupon receipts arising out of their investments in debt securities in India, falling due during the following twelve months subject to the condition that the hedge contracts shall not be eligible for rebooking on cancellation. The contracts can however be rolled over on maturity provided the relative coupon amount is yet to be received. All other regulations and guidelines issued under FEMA, 1999 relating to investment in debt securities and hedging facilities for non-resident investors including FPIs shall remain unchanged. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/ approvals, if any, required under any other law. 3. External Commercial Borrowings (ECB) in Indian Rupees RBI has vide its circular A.P. (DIR Series) Circular No.25 dated September 3, 2014 notified that in order to provide greater flexibility for structuring of ECB arrangements, the recognised non-resident ECB lenders may extend loans in Indian Rupees subject to the following conditions:
  1. The lender should mobilise Indian Rupees through swaps undertaken with an Authorised Dealer Category-I bank in India.
  2. The ECB contract should comply with all other conditions applicable to the automatic and approval routes as the case may be.
  3. The all-in-cost of such ECBs should be commensurate with prevailing market conditions.
  3. For the purpose of executing swaps for ECBs denominated in Indian Rupees, the recognised ECB lender, if it desires, may set up a representative office in India following the prescribed laid down process. The hedging arrangement for ECBs denominated in Indian Rupees extended by non-resident equity-holders shall continue to be governed by the provisions of AP (DIR Series) Circular No. 63 dated December 29, 2011.  
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