Corporate Law Alert April 2, J. Sagar Associates advocates and solicitors. Liberalized Remittance Scheme for Resident Individuals

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1 Liberalized Remittance Scheme for Resident The Reserve Bank of India (RBI) vide A.P. (DIR Series) Circular No. 90 dated March 06, 2012 has clarified the following with respect to the Liberalized Remittance Scheme for Resident (Scheme): (a) The Scheme is available to all resident individuals, including minors. (b) Remittances under the Scheme can be consolidated in respect of family members, subject to individual family members complying with the terms and conditions of the Scheme. (c) Remittances under the Scheme can be used for purchasing objects of art, subject to the provisions of other applicable laws such as the extant Foreign Trade Policy of the Government of India. Investment by Indian Venture Capital Undertakings and/or SEBI Registered Foreign Venture Capital Investors The RBI vide A.P. (DIR Series) Circular No. 93 dated March 19, 2012 has permitted SEBI registered Foreign Venture Capital Investors (FVCIs) to invest in eligible securities (equity, equity linked instruments, debentures of Indian Venture Capital Undertakings (IVCU) or Venture Capital Fund (VCF), units of schemes/funds set up by a VCF) by way of private arrangement / purchase from a third party, subject to the satisfaction of the conditions set out in Schedule 6 of Foreign Exchange Management (Transfer or Issue of Security by a Person resident outside India) Regulations, In addition to the above, FVCIs are also allowed to invest in securities on a recognized stock exchange subject to provisions of the SEBI (Foreign Venture Capital Investor) Regulations, Repayment of Foreign Currency Loans by In terms of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, an individual resident in India can borrow a sum upto USD 250,000 or its equivalent from his/her close relatives outside India subject to the satisfaction of the prescribed conditions. The RBI vide A.P. (DIR Series) Circular No. 95 dated March 21, 2012 has permitted AD Category - I Banks to allow the repayment of such loans by credit to the Non Resident (External) Rupee Account (NRE Account) or the Foreign Currency Non-Resident (Bank) account (FCNR (B) Account) of the lender provided that the loan to the resident individual was extended by way of inward remittance in foreign exchange through normal banking channels or by debit to the FCNR (B) Account and the lender is eligible under the Foreign Exchange Management (Deposit) Regulations, 2000 (FEMA Deposit Regulations) to open a NRE Account/ FCNR (B) Account. Repayment of the loan will be treated as an eligible credit to the NRE Account/ FCNR (B) Account for the purpose of Schedule I of the FEMA Deposit Regulations read with Para 5 of Schedule II of the FEMA Deposit Regulations. Overseas Direct Investment by Resident The RBI on a review of the facilities available to resident individuals under the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004 (ODI Regulations), for acquiring equity shares of a foreign entity by way of/under (i) qualification shares, (ii) professional services rendered and (iii) ESOP Scheme; has vide A.P. (DIR Series) Circular No. 97 dated March 28, 2012 granted general permission to resident individuals in respect of the following: (a) Acquisition of Qualification Shares of an overseas company for holding the post of a Director Remittance will be permitted from resident individuals for acquiring qualification shares for holding the post of a Director in the overseas company to the extent prescribed as per the law of the host country where the company is located. The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition. Prior to the aforementioned amendment, an individual resident in India could acquire foreign securities as qualification shares issued by a company incorporated outside India for holding the post of a Director in the company provided that (i) the number of shares so acquired were required to be the minimum required to be held for holding the post of director and in any case could not exceed 1

2 1 (one) per cent of the paid-up capital of the company, and (ii) the consideration for acquisition of such shares could not exceed the ceiling stipulated by RBI from time to time. (b) Acquiring shares of a foreign company towards professional services rendered or in lieu of director s remuneration Resident individuals can acquire shares of a foreign entity in part / full consideration of professional services rendered to the foreign entity or in lieu of a Director s remuneration. The limit of acquiring such shares in terms of value will be within the overall ceiling prescribed for the resident individuals under the LRS in force at the time of acquisition. Prior to this circular, a resident individual had to seek the prior permission of the RBI for acquiring shares of a foreign entity in consideration for the professional services rendered by such individual to the foreign entity. (c) Acquiring shares in a foreign company through ESOP Scheme Resident employees or directors of an Indian company are now permitted to accept shares offered under an ESOP Scheme globally, on a uniform basis, in a foreign company irrespective of the percentage of the direct or indirect equity stake in the Indian company subject to the satisfaction of the following conditions: i. the shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis; and ii. an Annual Return is submitted by the Indian company to the RBI through the AD Category I Bank giving details of remittances / beneficiaries, etc. Prior to the aforementioned relaxation, general permission had been granted to a resident individual to purchase equity shares offered by a foreign company under its ESOP Scheme, if such an individual was an employee, or, a Director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company / Special Purpose Vehicle (SPV), was not less than 51 per cent. Therefore, AD Category I banks were permitted to allow remittances for purchase of shares by eligible persons under this provision irrespective of the method of operationalisation of the scheme i.e. where the shares under the scheme were offered directly by the issuing company or indirectly through a trust / a SPV / step down subsidiary, provided: i. the company issuing the shares effectively, directly or indirectly, held in the Indian company, whose employees / directors are being offered shares, not less than 51 per cent of its equity, ii. iii. the shares under the ESOP Scheme were offered by the issuing company globally on a uniform basis, and an Annual Return was submitted by the Indian company to the RBI through the AD Category I bank giving details of remittances / beneficiaries, etc. Overseas Direct Investment by Indian Party The RBI vide A.P. (DIR) Series Circular No. 96 dated March 28, 2012 has liberalized various provisions of the ODI Regulations. The liberalizations to various provisions / regulations are detailed hereunder: (a) Creation of charge on immovable / movable property and other financial assets: The existing regulations do not envisage the creation of a charge on the immovable / movable property and other financial assets (except shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS)) of the Indian party. In view of the foregoing, the RBI has decided that proposals from the Indian party for creation of a charge in the form of pledge / mortgage / hypothecation on the immovable / movable property and other financial assets of the Indian party and its group companies may be considered by the RBI under the approval route within the overall limit fixed (presently 400%) for financial commitment, subject to submission of a No Objection by the Indian party and its Group companies from their Indian lenders. (b) Reckoning bank guarantee issued on behalf of JV / WOS for computation of financial commitment At present, the bank guarantee issued on behalf of the JV / WOS is not reckoned for the purpose of computing the financial commitment of the Indian party to its JV / WOS overseas. 2

3 However, the RBI has now decided that the bank guarantee issued by a resident bank on behalf of an overseas JV / WOS of the Indian party, which is backed by a counter guarantee / collateral by the Indian party, shall be reckoned for computation of the financial commitment of the Indian party and be reported accordingly. (c) Issuance of personal guarantee by the direct / indirect individual promoters of the Indian Party The RBI has decided that the issuance of a personal guarantee by the promoters of the Indian party as presently allowed (with general permission) will also be extended to the indirect resident individual promoters of the Indian party with the same conditions as may be applicable in the case of personal guarantees by the direct promoters. (d) Financial Commitment without equity contribution to JV / WOS At present, Regulation 6(4) of the ODI Regulations prescribes that an Indian party may extend a loan or a guarantee to or on behalf of its JV / WOS abroad, within the permissible financial commitment, provided that the Indian party has made investment by way of contribution to the equity capital of the JV. Keeping in view the business requirements of the Indian party, particularly the legal requirement of the host country, the RBI has decided that the proposals from the Indian party for undertaking financial commitment without equity contribution in the JV / WOS may be considered by under the approval route. (e) Submission of Annual Performance Report Regulation 15(iii) of the ODI Regulations prescribes that the Indian party needs to submit to the RBI every year, through the designated Authorised Dealer bank, an Annual Performance Report (APR) in Form ODI Part III in respect of each JV / WOS outside India, set up or acquired by the Indian party, after the finalization of the audited accounts of the JV / WOS outside India. However, the RBI has decided that where the law of the host country does not mandatorily require auditing of the books of accounts of the JV / WOS, the APR may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS, provided: i. the statutory auditor of the Indian party certifies that the un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS; and ii. that the un-audited annual accounts of the JV / WOS have been adopted and ratified by the board of directors of the Indian party. (f) Compulsorily Convertible Preference Shares (CCPS) The extant provisions on Overseas Direct Investment envisage setting up or acquiring a JV / WOS abroad by subscribing / contributing to the equity capital of the JV / WOS. Therefore, contribution to the preference share capital (whether convertible or nonconvertible) of the JV / WOS abroad by the Indian party is treated as loan rather than equity. Keeping in view the nature of Compulsorily Convertible Preference Shares (CCPS), the RBI has decided that CCPS will be treated at par with equity shares and the Indian party is allowed to undertake financial commitment by way of CCPS. Review of all-in-cost ceiling External Commercial Borrowing The RBI vide A.P. (DIR Series) Circular No. 99 dated March 30, 2012 has decided to continue with the enhanced All-in-Cost ceiling for External Commercial Borrowings (ECB) which was specified by it vide A.P. (DIR Series) Circular No. 51 dated November 23, The enhanced Allin-Cost ceiling for ECB is as follows: Average Maturity Period 3 years and upto 5 years More than 5 years All-in-Cost over 6 month LIBOR (for the respective currency of borrowing or applicable benchmark) 350 bps 500 bps The aforementioned all-in-cost ceiling is applicable upto September 30, 2012 and may be reviewed thereafter. All the other aspects of ECB policy remain unchanged. 3

4 The RBI has revised the All-in-Cost Ceiling for ECB in view of the recent developments in the global financial markets as a result of which borrowers were experiencing difficulties in raising ECB. 4

5 For further information please contact: Disclaimer: This newsletter is not an advertisement or any form of solicitation. This newsletter has been compiled for general information of clients and does not constitute professional guidance or legal opinion. Readers should obtain appropriate professional advice. J. Sagar Associates I advocates & solicitors Gurgaon New Delhi Mumbai Bangalore Hyderabad Copyright J. Sagar Associates all rights reserved 5