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By: Seth Dua & Associates
New Delhi, India

The RBI has decided to increase the limit under the Liberalised Remittance Scheme (“LRS”) from USD 75,000 to USD 125,000 per financial year. Further, RBI has clarified that resident individuals can now invest upto USD 125,000 per financial year under this scheme for acquisition of immovable property outside India.

Issue of equity shares under the FDI Scheme against legitimate dues

RBI has decided to permit issue of equity shares against any funds payable by the investee company to a foreign investor, the remittance of which does not require prior permission of the GoI or RBI under the FEMA, provided that:

  1. The equity shares shall be issued in accordance with the FDI guidelines on sectoral caps, pricing guidelines etc. as amended by RBI 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.

FDI in Railway Infrastructure

The GoI has decided to allow 100 per cent FDI in railway infrastructure sector under the automatic route subject to conditions and to permit FDI in the following activities of the Railway Transport sector.

For construction, operation and maintenance of the following:

  1. Suburban corridor projects through Public Private Partnership (“PPP”);
  2. High speed train projects;
  3. Dedicated freight lines;
  4. Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities;
  5. Railway Electrification;
  6. Signaling systems;
  7. Freight terminals;
  8. Passenger terminals;
  9. Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivity's to main railway line and
  10. Mass Rapid Transport Systems.

FDI in Sensitive Area

From security point of view, it has been decided that FDI beyond 49 per cent of the equity of the investee company in sensitive areas will be brought before the CCS for consideration on a case-to-case basis.

Parking of ECB proceeds under External Commercial Borrowing (“ECB”) Policy

The RBI has decided to permit AD Category -I banks (“AD Banks”) to allow eligible ECB borrowers to park the ECB proceeds (both under the automatic and approval routes) in term deposits with the AD Banks in India for a maximum period of six months pending utilization for permitted end uses subject to the following conditions:

  • The applicable guidelines on eligible borrower, recognized lender, average maturity period, all-in- cost, permitted end uses, etc. should be complied with.
  • No charge in any form should be created on such term deposits i.e. to say that the term deposits should be kept unencumbered during their currency.
  • Such term deposits should be exclusively in the name of the borrower.
  • Such term deposits can be liquidated as and when required.

Security for External Commercial Borrowings

The RBI has decided that AD Banks may now allow creation of charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees in favour of overseas lenders, to secure the ECB raised by the borrower, subject to satisfying themselves that:

  1. the underlying ECB is in compliance with the applicable ECB guidelines,
  2. there exists a security clause in the Loan Agreement requiring the ECB borrower to create charge, in favour of overseas lender / security trustee, on immovable assets / movable assets / financial securities / issuance of corporate and / or personal guarantee, and
  3. No objection certificate, wherever necessary, from the existing lenders in India has been obtained.

Rationalization / Liberalization of Overseas Direct Investments by Indian Party

The RBI has decided that the designated AD Bank may now permit creation of charge / pledge on the shares of the JV / Wholly Owned Subsidiary (“WOS”) / Step down Subsidiary (“SDS”) (irrespective of the level) of an Indian party in favour of a domestic or overseas lender for securing the funded and / or non-funded facility to be availed of by the Indian party or by its group companies / sister concerns / associate concerns or by any of its JV / WOS / SDS (irrespective of the level) under the automatic route by complying the prescribed conditions.

It has also been decided that the designated AD Bank may permit creation of charge (by way of pledge, hypothecation, mortgage, or otherwise) on the domestic assets of an Indian party (or its group companies / sister concerns / associate concerns including the individual promoters / directors) in favour of an overseas lender for securing the funded and / or non-funded facility to be availed of by the JV / WOS / SDS (irrespective of the level) of the Indian party under the automatic route by complying the prescribed conditions.

It has further been decided that the designated AD Bank may permit creation of charge (by way of hypothecation, mortgage, or otherwise) on the overseas assets (excluding the shares) of the JV / WOS / SDS (irrespective of the level) of an Indian party in favour of a domestic lender for securing the funded and / or non-funded facility to be availed of by the Indian party or by its group companies / sister concerns / associate concerns or by any of its overseas JV / WOS / SDS (irrespective of the level) under the automatic route by complying the prescribed conditions.

Revised pricing guideline for Issue/Transfer of Shares or Convertible Debentures under FDI Policy

The RBI has notified new pricing guidelines for Issue/Transfer of Shares or Convertible Debentures under the FDI Policy as under:

  1. In case of listed companies
    1. The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures shall be as per the Securities and Exchange Board of India (“SEBI”) guidelines;
    2. The pricing guidelines for FDI instruments with optionality clauses shall be at the market price prevailing on the recognized stock exchanges subject to a lock-in period as stipulated, without any assured return.
  2. In case of unlisted companies

The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures with or without optionality clauses shall be at a price worked out as per any internationally accepted pricing methodology on arm's length basis. Thus, the guiding principle will be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at a fair price computed as above at the time of exit subject to lock-in period requirement.

The issue and transfer of shares including compulsorily convertible preference shares and compulsorily convertible debentures with or without optionality clauses shall be at a price worked out as per any internationally accepted pricing methodology on arm's length basis. Thus, the guiding principle will be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at a fair price computed as above at the time of exit subject to lock-in period requirement.

It has also been stipulated by the RBI that an Indian company taking on record in its books any transfer of its shares or convertible debenture by way of sale from a resident to a non-resident and a non-resident to a resident shall disclose in its balance sheet for the financial year, in which the transaction took place, the details of valuation of shares or convertible debentures, the pricing methodology adopted for the same as well as the agency that has given/certified the valuation.

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