Article. RBI replaces Master Directions for Master Circulars. Team Vinod Kothari & Company 21 st January, 2015

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1 Article RBI replaces Master Directions for Master Circulars Team Vinod Kothari & Company 21 st January, 2015 Check at: for more write ups. Copyright: This document is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This document is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 Contents Issuance of the Master Directions Setting up of branch/liaison/project office Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians/ Persons of Indian Origin Money changing Activity External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorized Dealers and Persons other than Authorized Dealers Imports of goods & services Export of goods and services Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad Compounding of Contraventions There has been no changes in the following subject matter... 18

3 Issuance of the Master Directions It may be recalled that Governor Dr. Raghuram G. Rajan had, in the Fourth Bi-monthly Monetary Policy Statement, announced on September 29, 2015 (Para 29) that The Reserve Bank will update all its master regulations, and streamline the required procedure for compliance with the regulations by January 1, All master regulations will be fully updated and placed online. The Reserve Bank will also work to improve clarity in regulatory communications. In the wake of above statement and with the view to simplify complexities, the Reserve Bank of India on 4 th January issued 17 Master Directions covering foreign exchange transactions. Master Directions have been issued with the aim to consolidate instructions on all rules and regulations issued by Reserve Bank of India under various Acts including banking issues and foreign exchange. Before delving into the comparisons between the Master Directions and the Master Circulars, we need to understand what a Master Direction actually is. Master Direction, is the compilation of relevant A.P (DIR Series) Circulars issued so far within the ambit of the relevant regulations, amended up to date and cover different classes of transactions permitted under the rules and regulations framed under the Foreign Exchange Management Act, 1999 (FEMA). It supersedes the Master Circular. Also, explanations of rules and regulations will be issued by way of Frequently Asked Questions (FAQs) after issue of the Master Directions wherever necessary. The process of issuing Master Directions involves issuing one Master Direction for each subject matter covering all instructions on that subject. Any changes in the rules, regulation or policy are intended to be communicated during the year by way of circulars. These changes will get reflected in the Master Directions available on the RBI website along with the dates on which changes are made Master Directions on foreign exchange matters primarily deal with the manner in which an authorized person should conduct cross border/forex transactions. The forex transactions are conjointly regulated by RBI and GOI. The Reserve Bank frames regulations in respect of capital account and trade transactions in terms of Sections 6, 7, 8, 9, 10 and 47 of FEMA whereas the Government of India frames rules in respect of current account transactions and compounding proceedings. Further, as per section 3 of FEMA, all cross border and/or foreign exchange transactions are to be conducted through a person authorized to do so under section 10 of FEMA. Therefore, Reserve Bank of India issues directions [through A.P. (DIR Series) Circulars] to the Authorized Persons under section 11 of FEMA in regard to the manner of conducting these transactions with their customers/ constituents. However with so many circulars in place, there was a major problem of communication, as for every change, the particular circular needed to be revised. Therefore, in a bid to simplify communication, the RBI has issued Master Directions which consolidates instructions in all the previous issued A.P. (DIR Series) Circulars in one place. In an attempt to point out the relevant changes introduced by RBI, we have tabularized all the relevant and prominent changes taking into account 15 Master Directions. The following table accounts for the differences between the Master Direction and Master Circulars

4 Basis Master Directions Master Circulars Remarks 1. Setting up of branch/liaison/project office Reporting requirement All new entities setting up LO/BO/PO in India shall submit a report containing information, as per format provided in Annex-4 within five working days of the LO/BO/PO becoming functional to the Director General of Police (DGP) of the state concerned in which LO/BO/PO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India. All new entities setting up Project Offices shall submit a report containing information, as 13 per format provided in Annex 3 within five working days of the PO becoming functional to the Director General of Police (DGP) of the state concerned in which PO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India The master directions are wider in scope as it encompasses LO/BO/PO but the master circular considers only project office for reporting requirement. 2. Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999 Acquisition of immovable property by person resident outside India for carrying on a permitted activity Acquisition of immovable property in India by a branch, office or other place of business, of entities of Pakistan or Bangladesh or Sri Lanka or Afghanistan New provision Restrictive clause: branch, office or any other place or office of any entity of the said places cannot acquire any immovable

5 Repatriation of sale proceeds of immovable property or China or Iran or Hong Kong or Macau or Nepal or Bhutan origin/ nationality/ ownership requires the prior approval of the Reserve Bank. In case an immovable property in India has been purchased by an NRI/ PIO out of housing loans availed in terms of Foreign Exchange Management (Borrowing and lending in rupees) Regulations, 2000, as amended from time to time, and the repayments for such loans are made out of remittances received from abroad through banking channels or by debit to the NRE/ FCNR(B) account of the NRI, such repayments may be treated as equivalent to foreign received. exchange property without prior approval of RBI New provision - 3. Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians/ Persons of Indian Origin Borrowing in INR by persons other than companies in India Payment of interest and repayment of principal shall be made only to the NRO account of the lender where the loan is made out of funds held in Non-resident Special Rupee (NRSR) account of the lender, payment of interest and repayment of loan shall be made by credit to that account; and in other cases, payment of interest and repayment Option to pay any interest and principal out of NRSR has been removed. Now payment of interest and repayment of loan can be only done through NRO account of the lender

6 of loan shall be made by credit to the lender's Non-resident Ordinary (NRO) or Non-resident Special Rupee (NRSR) account as desired by the lender; 4. Money changing Activity Pre-paid forex card In this regard, it is clarified that prepaid foreign currency cards are a form of foreign currency, similar to foreign currency notes or travellers cheque. As such, the authorised dealers/ffmcs selling pre-paid foreign currency cards for travel purposes are required to comply with the same rigorous standards of due diligence and KYC as they would in case they were selling foreign currency notes/ travellers cheque to their customers. Authorised Dealers Category-II may issue forex pre-paid cards to residents travelling on private/business visit abroad, subject to KYC/AML/CFT requirements. However, the settlement in respect of forex pre-paid cards may be effected through AD Category-I banks. Clarification has hence forth been provided 5. External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorized Dealers and Persons other than Authorized Dealers Hedging Requirements The entities raising ECB under the provisions of tracks I and II are required to follow the guidelines for hedging issued, if any, by the The entities raising ECB under the provisions of tracks I and II are required to follow the guidelines issued, if any, by the In order to make the language clear and specific the entities need to follow guidelines

7 concerned sectoral or prudential regulator in respect of foreign currency exposure Form of ECB Loan including Bank loan Participation of overseas branches / subsidiaries of Indian banks Additional Requirements: Raising of loans as Trade Credit Under the USD 10 billion scheme, ECB cannot be raised from overseas branches / subsidiaries of Indian branches. While permitting changes under the delegated powers, the AD Category I banks should ensure that Changes in the end-use of ECBs raised under the approval route will continue to be referred to the Foreign Exchange Department, Central Office, Reserve Bank of India, Mumbai Imports should be as permissible under the extant Foreign Trade Policy of the Director General of Foreign Trade (DGFT) concerned sectoral or prudential regulator. regarding foreign currency exposure. Bank loan The scope has been widened in the Directions. Participation of - overseas branches / subsidiaries of Indian banks under Track I is subject to the prudential norms issued by the DBR, RBI. New provision - No reference Further clarification regarding authority regulating imports. the 6. Imports of goods & services Time Limit for Deferred Payment Arrangements Issue of Guarantees by an Deferred payment arrangements (including suppliers and buyers credit) upto five years, are treated as trade credits An authorised dealer may give a guarantee or Letter Deferred payment arrangements, including suppliers and buyers credit, providing for payments beyond a period of six months from date of shipment up to a period of less than three years, are treated as trade credits New provision There has been a change in time period for considering deferred payment arrangement to be considered as trade credits. RBI has issued notification

8 Authorised Dealer AD Category I bank may handle bonafide Merchanting Trade Transactions and ensure that: of Undertaking of Letter of Comfort in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India, as an importer, in respect of import on deferred payment terms in accordance with the approval by the Reserve Bank of India for import on such terms. No guarantee for an amount exceeding USD 500,000 shall be issued on behalf of a service importer other than a Public Sector Company where the service importer is a Public Sector Company or a Department / Undertaking of the Government of India / State Government, no guarantee for an amount exceeding USD 100,000 shall be issued without the prior approval of the Ministry of Finance, Government of India 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. 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 in the format as given in Annex 3, within 15 days from the close of each half year, i.e. June and regarding issuance of guarantee by an AD, which was not there previously. Annex 3 has been removed by RBI.

9 December. 7. Export of goods and services Issue of Guarantees by an Authorised Dealer An authorized dealer may give guarantee in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India, where the debt, obligation or other liability is incurred by the person resident in India as an exporter, on account of exports from India. An authorized dealer may give a guarantee in respect of any debt, obligation or other liability incurred by a person resident outside India, in the following cases, namely: (i) where such debt, obligation or liability is owned to a person resident in India in connection with a bonafide trade transaction: Provided that the guarantee given under this clause is covered by a counter-guarantee of a bank of international repute resident broad; (ii) as a counter- No Reference Issue of guarantee by Authorized Dealer has been added as a topic.

10 Manner of Receipt and Payment guarantee to cover guarantee issued by his branch or correspondent outside India, on behalf of Indian exporter in cases where guarantees of only resident banks are acceptable to overseas buyers AD Category-I banks desirous of entering into such an arrangement/s should report the details of each such arrangement as and when entered into to the Foreign Exchange Department, Central Office, Reserve Bank of India, Mumbai. OPGSPs who are already providing such services as per the specific holding-on approvals issued by the Reserve Bank shall open a liaison office in India within three months from November 16, 2010, after duly finalizing their arrangement with the AD-Category-I banks and obtaining approval from the Reserve Bank for this purpose. In respect of all new arrangements, the OPGSP shall open a liaison office with the approval of the Reserve Bank before operationalising the arrangement. AD Category-I banks desirous of entering into such an arrangement/s should approach the Reserve Bank for obtaining one time permission in this regard and thereafter report the details of each such arrangement as and when entered into. Removal of one time approval from the RBI for entering into arrangements.

11 8. Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad Obligations of Indian Party (4) An annual return on Foreign Liabilities and Assets (FLA) is required to be submitted directly by all the Indian companies which have received FDI and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year, to the Director, External Liabilities and Assets Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India. The Annual Return on FLA is available on the RBI website ( Forms category FEMA Forms) which can be duly filled-in, validated and sent by , by July 15 every year. - Obligation w.r.t to filing of FLA has been now provided specifically in the said Direction though it was provide in the Regulations. C.5 Issue of Indian Depository Receipts (IDRs) Eligible companies resident outside India may issue Indian Depository Receipts (IDRs) through a Domestic Depository. The permission has been granted subject to compliance with the Companies (Issue of Depository Receipts) Rules, 2004 and subsequent No such provision here. -

12 amendments made thereto and the SEBI (DIP) Guidelines, 2000, as amended from time to time. In case of raising of funds through issuance of IDRs by financial/banking companies having presence in India, either through a branch or subsidiary, the approval of the sectoral regulator(s) should be obtained before the issuance of IDRs. Opening of Foreign Currency Account abroad by an Indian Party In terms of the conditions stipulated under A.P. (DIR Series) Circular No. 101 dated April 02, 2012, eligible Indian Party may open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments subject to the following terms and conditions: I. The host country regulations stipulate that the investments into the country are required to be routed through a designated account. II. FCA shall be opened, held and maintained as per the regulation of the host country. III. The remittances sent to the FCA by the Indian party should be Wherever, the host country Regulations stipulate that the investments (or financial commitment) into the country are required to be routed through a designated account, an Indian party is allowed to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments (or financial commitment) subject to certain terms and conditions stipulated under A.P. (DIR Series) Circular No. 101 dated April 02, A more detailed view has been provided in the Master Direction

13 utilized only for making overseas direct investment into the JV / WOS abroad. IV. Any amount received in the account by way of dividend and / or other entitlements from the subsidiary shall be repatriated to India within 30 days from the date of credit. V. The Indian Party should submit the details of debits and credits in the FCA on yearly basis to the designated AD bank with a certificate from the Statutory Auditors of the Indian party certifying that the FCA was maintained as per the host country laws and the extant FEMA regulations / provisions as applicable. The FCA so opened shall be closed immediately or within 30 days from the date of disinvestment from JV / WOS or cessation thereof Conditions for Indian entities to offer any form of Guaranteecorporate or personal/primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India. [Para B.1 4(a)(iv)] In terms of Regulation 5 (b) of Notification No. FEMA 8/2000-RB dated May 3, 2000, an authorised dealer in India may also give a Bank guarantee/ issue SBLC to a joint venture company or a whollyowned subsidiary of a company in India in connection with its business abroad No provision here It s a new condition added in the Directions.

14 General permission in certain cases provided that the terms and conditions stipulated in Foreign Exchange Management (Transfer and Issue of Foreign Security) Regulations, 2000 for promoting or setting up such company or subsidiary are continued to be complied with; d. Purchase of shares of a JV / WOS abroad of the Indian promoter company by the employees/directors of Indian promoter company which is engaged in the field of software where the consideration for purchase does not exceed the ceiling as stipulated by Reserve Bank from time to time. e. AD Category I banks may make remittances for purchase of foreign securities in the knowledge based sector under the ADR / GDR linked ESOPs, up to the ceiling as stipulated by the Reserve Bank from time to time after satisfying that the issuing company has followed the relevant guidelines of SEBI / Government. d. Purchase of shares of a JV / WOS abroad of the Indian promoter company by the employees/directors of Indian promoter company which is engaged in the field of software where the consideration for purchase does not exceed USD 10,000 or its equivalent per employee in a block of five calendar years. e. AD Category I banks may make remittances up to USD 50,000 or its equivalent in a block of five calendar years, without the prior approval of the Reserve Bank, for purchase of foreign securities in the knowledge based sector under the ADR / GDR linked ESOPs, after satisfying that the issuing company has followed the relevant guidelines of SEBI / Government In order to provide more flexibility to RBI, the limit has been removed and RBI shall reserve the power of changing the limit time to time. The fixed limit for remittances has been removed, instead the ceiling Investments (or Trading in Trading in Regulatory

15 financial commitment) in Financial Services Sector Investment in equity of companies registered overseas / rated debt instruments [Para B.7] Maintenance of collateral by FIIs for transactions in derivative segmentopening of demat accounts by Clearing Corporations and Clearing Members Commodities Exchanges overseas and setting up JV/WOS for trading in overseas exchanges will be reckoned as financial services activity and require clearance from SEBI. Investments made by listed Indian companies and Mutual Funds in accordance with para (1) and (2) above, are to be reported online on a monthly basis by the AD banks in the format as prescribed by the Reserve Bank from time to time SEBI approved clearing corporations of stock exchanges and their clearing members may undertake the following transactions subject to the guidelines issued from time to time by SEBI in this regard : Commodities Exchanges overseas and setting up JV/WOS for trading in overseas exchanges will be reckoned as financial services activity and require clearance from the Forward Markets Commission. No such provision No reference authority has been changed from FMC to SEBI The requirement for reporting of investment made by Mutual funds and Indian listed entities, to be made by the AD bank, has been provided for in the Directions. to open and maintain demat accounts with foreign depositories and to acquire, hold, pledge and transfer the foreign sovereign securities, offered as collateral by FIIs; to remit the proceeds arising from corporate action, if any, on such foreign sovereign securities; and to liquidate such foreign sovereign securities if the need

16 arises. Clearing Corporations shall report, on a monthly basis, the balances of foreign sovereign securities, held by them as noncash collaterals of their clearing members to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai. The report should be submitted by the 10th of the following month to which it relates. General procedural instructions Operational Instructions to Authorised Dealer Banks In case of disinvestment by way of closure / winding up / voluntary liquidation / merger/ amalgamation of JV/ WOS under the Automatic Route a report should continue to be submitted by the designated AD Category - I bank, in Part IV of form OD AD Category I banks may make remittances for purchase of foreign securities in the knowledge based sector under the ADR / GDR linked ESOPs, up to the ceiling as stipulated by the Reserve Bank from time to time. In case of disinvestment / closure / winding up / voluntary liquidation under the Automatic Route a report should continue to be submitted by the designated AD Category - I bank, in Part IV of form OD AD Category I banks may make remittances up to USD 50,000 or its equivalent in a block of five calendar years, without the prior approval of the Reserve Bank, for purchase of foreign securities in the knowledge based Scope of submission of report has been increased A ceiling has been prescribed now.

17 sector under the ADR / GDR linked ESOPs 9. Compounding of Contraventions Application Compounding for Scope and Manner of Compounding(factors to be taken into consideration for the purpose of passing the Compounding Order and for arriving at the quantum of sum on payment of which contravention shall be compounded) Scope and Manner of Compounding Pre-requisites for compounding process The applicants are also advised to bring to the notice of the compounding authority change, if any, in the address/ contact details of the applicant during the pendency of the compounding application with Reserve Bank. In case where adjudication has been done by the Directorate of Enforcement no contravention can be compounded in terms of Rule 11 of Foreign Exchange (Compounding No such provision here. No such provision here. Proceedings) Rules, No such provision here. The application for compounding will be disposed of on merits, upon consideration of the records and submissions and at the absolute discretion of the CA. No such provision here. The Reserve Bank generally advises the persons concerned of their choice and option to make an application for compounding as and when such contraventions come to its notice. The facts constituting such contraventions will be brought to the notice of the Directorate of New provision has been added requiring notice to be given to CA for any change in address/contact details of the applicant. New provision has been added stating about the manner of compounding for adjudication done by Directorate of Enforcement. Provision for disposal of application upon merits by CA has been removed. Provision of RBI specifying persons of their choice for making an application for compounding has been removed.

18 Enforcement in case no application for compounding is made within the time indicated by the Reserve Bank. Contents of the order of the Compounding No such provision here. Every such order shall be dated and signed by Authority the Compounding Authority under his seal. (Any further changes will be updated in this article as and when required) Removal of provision of dating and signing of orders by the CA. There has been no changes in the following subject matter Liberalised Remittance Scheme (LRS) (Corrected) Other Remittance Facilities Reporting under Foreign Exchange Management Act, 1999 Miscellaneous Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses Insurance To read other articles on the subject please Click here To read our resources on other subjects Click here