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Under the Foreign Exchange Management Act (FEMA) and the various notifications issued by the Reserve Bank of India under it, the investments in overseas JVs/WOSs may be funded out of one or more of the following sources:-
- Drawal of foreign exchange from an authorised dealer in India upto the extent of 100 percent of the Indian party's net worth as on the date of last audited balance sheet. Under Foreign Exchange Management Act (FEMA), the Reserve Bank may authorise any person to be known as an authorised person, to deal in foreign exchange as an authorised dealer, money changer or off-shore banking unit or in any other manner as it deems fit.
Classification of Persons Authorised to deal in the foreign exchange
| Sr. No. |
Present category |
Entities |
Revised category |
Major Activities |
| 1. |
Authorised Dealer |
- Commercial Banks
- State Co-op Banks
- Urban Co-op Banks
|
Authorised Dealer - Category - I |
All current and capital account transactions according to RBI directions issued from time-to-time. |
|
| 2. |
Authorised Dealer |
- Upgraded FFMCs
- Co-op. Banks
- Regional Rural Banks (RRBs)
- Others
|
Authorised Dealer - Category - II |
Specified non-trade related current account transactions as at paragraph 3 below as also all the activities permitted to Full Fledged Money Changers. Any other activity as decided by the Reserve Bank. |
|
| 3. |
Authorised Dealer |
- Select Financial and other Institutions
|
Authorised Dealer - Category - III |
Transactions incidental to the foreign exchange activities undertaken by these institutions. |
|
| 4. |
Full Fledged Money Changers (FFMCs) |
- Dept. of Posts
- Urban Co-op. Banks
- Other FFMCs
|
FFMCs |
Purchase of foreign exchange and sale for private and business visits abroad. |
|
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Source: Reserve Bank of India |
- Capitalisation of exports and other dues. Indian parties are permitted to capitalise:- (i) the payments due from the foreign entity towards exports made to it, fees, royalties; or (ii) any other entitlements due from the foreign entity for supplying technical know-how, consultancy, managerial and other services within the ceilings applicable. But, the export proceeds remaining unrealised beyond a period of six months from the date of export will require the prior approval of Reserve Bank before capitalisation.
Also, the Indian software exporters are permitted to receive 25 per cent of the value of their exports to an overseas software company in the form of shares without entering into Joint Venture Agreements, with the approval of the Reserve Bank.
- Share swap, which refers to the acquisition of the shares of an overseas entity by way of exchange of the shares of the Indian entity. Under this, Indian companies can automatically swap their fresh issue of American Depository Receipts (ADRs)/Global Depository Receipts (GDRs) for overseas acquisitions in the same core activity in accordance with the scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993 and the guidelines issued thereunder from time to time by the Central Government, subjected to compliance with the following conditions:-
- ADRs/GDRs are listed on any stock exchange outside India;
- Such investment by the Indian Party does not exceed the higher of the following amounts, namely:- (i) amount equivalent of USD 100 mn.; or (ii) amount equivalent to 10 times the export earnings of the Indian Party during the preceding financial year as reflected in its audited financial statements.
- The ADR and/or GDR issue for the purpose of acquisition is backed by underlying fresh
equity shares issued by the Indian Party;
- The total holding in the Indian entity by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed under the relevant regulations for such investment;
- Valuation of the shares of the foreign company shall be:- (i) as per the recommendations of the Investment Banker if the shares are not listed on any stock exchange; or (ii) based on the current market capitalization of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Banker in its due diligence report in other cases.
The Indian party is required to report such acquisition in Form ODG to the Reserve Bank within a period of 30 days from the date of the transaction.
- External commercial Borrowings (ECB)/Foreign Currency Convertible Bonds (FCCBs) raised abroad.
External Commercial Borrowings (ECBs) means borrowings in foreign exchange by a resident Indian, a firm, a bank or a company incorporated under the Indian Companies Act. It essentially includes:-
- Credit extended by foreign banks.
- Credit extended by foreign financial institutions.
- Credit extended by overseas corporate bodies (OCBs).
- Loans for imports, advances against exports, advances from overseas export credit agencies.
- Floating rate notes (FRN) and bonds.
- Credit extended by individuals abroad including Non Resident Indians (NRIs).
The Government has formulated policies and procedures governing each of the above categories. ECBs were first permitted by the Government in 1999 as a source of finance for Indian entities or individuals for setting up new projects (known as green field projects), expansion of existing business, infrastructure projects and fresh investment in general. Policy on ECBs is framed by the Government of India in consultation with RBI. Government has been liberalising ECB procedures in order to enable Indian corporates, to have greater access to international financial markets. It has empowered Reserve Bank of India to give ECB approvals in accordance with the guidelines brought out by the RBI. Under the policy, ECBs can be accessed under two routes, namely :-
- Automatic route:- ECBs for investment in the real sector is under the Automatic Route i.e. will not require RBI or Government approval.
- Approval route:- All cases which fall outside the purview of the automatic route, will be decided by an Empowered Committee set up by RBI. In case of doubt as regards eligibility to access Automatic Route , applicants may take recourse to the Approval Route .
The banks in India offering ECBs are:-
Foreign Currency Convertible Bonds(FCCBs) can be issued by Indian companies in the overseas market in accordance with Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993. The FCCB issue needs to conform to External Commercial Borrowing guidelines, issued by Reserve Bank vide Notification No. FEMA 3/2000-RB dated May 3, 2000, as amended from time to time.
- Exchange Earner's Foreign Currency(EEFC) account of the Indian party. EEFC account means an account expressed in foreign currency and maintained with an authorised dealer (a bank dealing in foreign exchange) in India to credit prescribed percentage of earnings in convertible foreign currency. A person resident in India such as individuals, firms, companies, etc.,may open such an account. The permissible credits into this account are:-
- Inward remittance through normal banking channel, other than remittances received on account of foreign currency loan or investment received from abroad or received for meeting specific obligations by the account holder.
- Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area.
- Payments received in foreign exchange by a unit in Domestic tariff Area for supply of goods to a unit in Special Economic Zone (SEZ).
- Payment received by an exporter from an account maintained with an authorised dealer for the purpose of counter trade. (Counter trade is an arrangement involving adjustment of value of goods imported into India against value of goods exported from India in terms of Reserve Bank guidelines).
- Advance remittance received by an exporter towards export of goods or services.
- Payment received for export of goods and services from India, out of funds representing repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic Affairs, Moscow, with an authorised dealer in India.
- Professional earnings including directors fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity.
- Interest earned, if any, on the funds held in the account.
- Re-credit of unutilised foreign currency earlier withdrawn from the account.
- Amount representing repayment by the account holder's importer customer, of loan/advances granted, by the exporter holding such account.
- Indian companies are allowed to raise capital in the international market through the issue of American Depository Receipts (ADRs)/Global Depository Receipts (GDRs). They can issue ADRs/GDRs without obtaining prior approval from the Reserve Bank of India if they are eligible to issue ADRs/GDRs in terms of the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subsequent guidelines issued by Ministry of Finance, Government of India:-
These instruments are issued by a Depository abroad and listed in the overseas stock exchanges. The proceeds so raised have to be kept abroad till actually required in India. After the issue of ADRs/GDRs, the company has to file a return in the proforma given in Annexure 'C' to the Reserve Bank Notification No.FEMA.20/ 2000-RB dated May 3, 2000. The company is also required to file a quarterly return in a form specified in Annexure'D' of the same regulation. There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets.
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