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Exchange Control
External Commercial Borrowing Liberalised – Flexibility to Telecommunication Companies for Raising Funds
RBI has brought in changes to the existing policy governing External Commercial Borrowings (“ECB”). RBI has amended the existing ECB policy vide its circular, dated January 25, 2010. With this circular, RBI has given flexibility to telecommunication companies on the issue of tapping ECB for payment of Spectrum Allocation Fee (“Fee”) by allowing them to meet the Fee out of rupee resources and then refinance it with a long-term ECB, under the approval route. However, under this amendment certain conditions are to be met for availing the flexibility of replacing rupee debt with foreign debt. The conditions are that ECBs should be raised within 12 months from the date of payment of the final installment to the GOI; the Authorised Dealer (“AD”) should monitor the end-use of funds and domestic banks will not be permitted to provide any guarantee. All other conditions of ECBs – such as eligible borrower, recognised lender, all-in cost, average maturity – should be complied with.
Certain important and recent legal developments in this area are set out below.
Exchange Control
External Commercial Borrowing Liberalised – Flexibility to Telecommunication Companies for Raising Funds
RBI has brought in changes to the existing policy governing External Commercial Borrowings (“ECB”). RBI has amended the existing ECB policy vide its circular, dated January 25, 2010. With this circular, RBI has given flexibility to telecommunication companies on the issue of tapping ECB for payment of Spectrum Allocation Fee (“Fee”) by allowing them to meet the Fee out of rupee resources and then refinance it with a long-term ECB, under the approval route. However, under this amendment certain conditions are to be met for availing the flexibility of replacing rupee debt with foreign debt. The conditions are that ECBs should be raised within 12 months from the date of payment of the final installment to the GOI; the Authorised Dealer (“AD”) should monitor the end-use of funds and domestic banks will not be permitted to provide any guarantee. All other conditions of ECBs – such as eligible borrower, recognised lender, all-in cost, average maturity – should be complied with.
ECB Policy Simplified- Delegation of Powers to ADs
With a view to simplify the process/procedure for making changes to terms and conditions of ECB, RBI vide its circular dated February 09, 2010 made certain changes in the existing policy.
Henceforth, the borrowers have to approach their AD for making changes to the terms and conditions of the ECB availed by them such as:
a. Changes / modifications in the drawdown/ repayment schedule
Henceforth, the AD’s may approve changes/ modifications in the drawdown/ repayment schedule of ECB’s already availed, both under automatic and approval routes subject to the following conditions:
· the average maturity period, as declared while obtaining Loan Registration Number is maintained.
· prompt reporting of changes in drawdown/repayment schedule to RBI in Form 83.
b. Changes in currency of borrowing
AD’s may allow changes in the currency of borrowing, if requested by the borrower company, in respect of ECB’s availed under both automatic and approval routes.
c. Changes of the AD bank
AD’s may allow replacement of the existing AD by the borrower for carrying out transactions pertaining to ECB’s availed by it subject to NOC from the existing AD and after due diligence.
d. Changes in the name of the borrowing company
AD’s may allow alteration in the name of the borrower bank subject to production of documents evidencing the change in the name from the ROC.
ECB Policy Liberalised - Extended Definition of Infrastructure Sector
RBI has amended its policies relating to foreign currency borrowings in relation to the infrastructure sector vide its circular dated March 02, 2010.
Indian companies in the infrastructure sector are presently permitted to utilize foreign currency loans availed under the ECB policy for investments (such as import of capital goods, new projects, modernization, expansion of existing production units).
The ECB policy defined infrastructure sector as comprising of (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, exploration and refining.
The RBI has now extended the above definition of infrastructure sector for the purposes of the ECB policy to include ‘cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat’.
ECB Policy for Non-Banking Financial Companies Engaged in Infrastructure Sector Liberalised
Until recently, the RBI classified Non-Banking Financial Companies (“NBFCs”) as (i) asset finance companies, (ii) loan companies (iii) investment companies (iv) housing finance companies, and (v) residuary non-banking companies. Under the ECB policy, NBFCs exclusively engaged in financing of the infrastructure sector, regardless of their classification, were permitted to raise funds in foreign currency subject to prior RBI approval.
RBI has introduced Infrastructure Finance Companies (“IFCs”) as an additional category of NBFCs vide its circular dated February 12, 2010. With the introduction of the IFC category, the RBI has now clarified that other categories of NBFCs would no longer be eligible to raise foreign currency funding for financing infrastructure projects. IFCs can raise foreign currency loans for funding the infrastructure sector (as defined under the ECB Policy) with the prior approval of the RBI subject to:
(i) compliance with the norms specified in the circular introducing the IFC category;
(ii) fully hedging the currency risk; and
(iii) total outstanding ECBs not exceeding 50 percent of owned funds.
Revised ECB Policy for Structured Obligations in Infrastructure Sector
RBI permits rupee denominated structured obligations of an Indian issuer to be credit enhanced by non-resident entities with the prior approval of the RBI. In the event that the guarantee was invoked, RBI permitted the Indian issuer to reimburse the non-resident guarantor the rupee equivalent of the amount paid by the non-resident guarantor under the guarantee. With a view to facilitate funding for the infrastructure sector, the RBI has now announced a comprehensive policy framework for credit enhancement of domestic debt raised through capital market instruments such as bonds and debentures, by Indian companies engaged in the development of infrastructure and by IFCs. The key features of the policy framework are as follows:
1. Credit enhancement can be provided by multilateral / regional financial institutions and Government owned development financial institutions;
2. The underlying debt instrument (i.e. bonds or debentures) should have a minimum average maturity of seven years;
3. Prepayment and call / put options would not be permissible for such debt instruments up to an average maturity period of 7 years;
4. Guarantee fees and other costs in connection with the credit enhancement arrangement not to exceed 2 percent of the principal amount involved;
5. Where the guarantor is required to meet the liability, a new loan will effectively come into existence between the Indian issuer and the guarantor.
6. Where such a loan is permitted to be serviced in foreign currency, all-in-cost ceilings specified under the ECB Policy would apply to such novated loans. On the other hand, if such a loan will be serviced in Indian Rupees, the applicable rate of interest would be the higher of (i) the coupon of the bonds or (ii) 250 basis points over the prevailing secondary market yield of 5 year GOI security, as on the date of novation;
7. As with any foreign currency borrowings contracted by an IFC, such IFC’s will be required to fully hedge their foreign currency exposures under such novated loans; and
8. Reporting requirements under the ECB Policy would apply to such novated loans.
Review of Cases Under Approval Route for Making Foreign Investment
Ministry of Commerce and Industry, GOI has on March 25, 2010 issued Press Note No.1 (2010 Series) for enhancing the limits for consideration of foreign investment proposals under approval route by Foreign Investment Promotion Board (“FIPB”) and Cabinet Committee on Economic Affairs (“CCEA”). Henceforth, the following approval levels shall operate for proposals involving foreign investment under approval route ( i.e. requiring prior government approval):
i. The Minister of Finance, GoI who is in charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below INR 1200 billion.
ii. The recommendations of FIPB on proposals with total foreign equity inflow of more than INR 1200 billion would be placed for consideration of CCEA.
iii. CCEA would also consider the proposals which may be referred to it by the FIPB/Minister of Finance.
Further, it has also been decided that the cases where prior approval of FIPB/CCEA for making the initial foreign investment were taken, then the following types of cases would not require to approach FIPB/Government for fresh approval:
a. Cases of entities whose activities had earlier required prior approval of FIPB/Cabinet Committee on Foreign Investment(“CCFI”)/CCEA and who had, accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial foreign investment but subsequently such activities/sectors have been placed under automatic route;
- Cases of entities whose activities had sectoral caps earlier and who had, accordingly, earlier obtained prior approval of FIPB/CCFI/CCEA for their initial foreign investment but subsequently such caps were removed or increased and the activity placed under the automatic route; provided that such foreign investment along with the initial/original investment does not exceed the sectoral caps; and
- Cases where prior approval of FIPB/CCFI/CCEA had been obtained with reference to activities/sectors requiring such approval and also from the perspective of provisions of Press Note 18/1998 or Press Note 1 of 2005.
Analysis of the Consolidated FDI Policy – Circular 1, 2010
The significant changes brought in the FDI policy by the GOI have been outlined in brief herein below:
1. The consolidated policy while defining the term Capital has excluded instruments like warrants, partly paid shares etc. from the scope of Capital and prohibits issuance of these instruments;
2. The definition of the term ‘Joint Venture’ has been incorporated for the ease of understanding;
3. Under the consolidated policy a company would be considered as ‘owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and/or Indian companies (in place of Indian citizens and Indian companies stipulated under earlier policy) which are ultimately owned and controlled by resident Indian citizens;
4. The broad framework for agriculture sector has not been changed under the consolidated policy. Though, under the consolidated policy, certain conditions to be complied by companies dealing with development of transgenic seed /vegetables have been incorporated;
5. The consolidated policy has not brought any changes in the sector of manufacturing of cigars & cigarettes. However , on April 8, 2010, CCEA approved a recommendation of Department of Industrial Policy and Promotion (‘DIPP”), Ministry of Commerce and Industry, GOI, had prohibited any further FDI in companies indulged in manufacturing of cigarettes and to include the activity in the list of activities prohibited for FDI;
6. The consolidated policy now mandates upfront valuation of convertible instruments;
7. Earlier, the investment in the Indian Venture Capital Fund (“IVCF”) incorporated as a trust was permitted if such trust was registered with Securities Exchange Board of India (“SEBI”). However, the consolidated policy stipulates government approval for investment in IVCF. Further, it also mandates that the Trust should be registered under the Indian Trust Act, 1882;
8. The ambiguity surrounding the prohibition of FDI in certain activities which although indirectly were part of the sectors prohibited for FDI under the earlier policy, have been further clarified under Circular 1 of 2010. The clarifications brought in are as follows:
(a) Government /private lottery, online lotteries, etc. have been expressly mentioned to be prohibited in the category of Lottery Business;
(b) Casinos have been brought within the ambit of gambling and betting where the FDI would be prohibited;
(c) Real estate business or construction of farm houses has been added in the list of sectors where FDI would be prohibited;
(d) A complete prohibition on foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract for Lottery Business and Gambling and Betting activities has been inserted.
9. The consolidated policy has brought clarity on the aspect of foreign investment in the security agencies in private sector by spelling out the following relevant restrictions:
· a foreign company cannot be considered for a license under the Foreign Exchange Management Act, 1995 (“FEMA”); and
· majority shareholder cannot be a foreigner-i.e. foreign shareholding would be restricted to a maximum of 49% under the Government route.
10. With an endeavour to bring in clarity enveloping the trading activities falling within the scope of Wholesale/ Cash and Carry trading in which 100% FDI under automatic route is permitted, the consolidated policy has inserted the definition of Cash & Carry Wholesale trading/Wholesale trading. The consolidated policy also spells out the guidelines for Cash & Carry Wholesale Trading/Wholesale Trading which were not there in the earlier policy. In future these prescribed guidelines shall have to be necessarily complied with for foreign investment in Cash & Carry Wholesale Trading/Wholesale Trading.
11. The changes brought in the civil aviation sector are as follows:
(a) The consolidated policy has reduced the FDI ceilings under automatic route in non – scheduled air transport service/ non – scheduled airlines, chartered airlines, and cargo airlines segment from 74% to 49%. Further, FDI under the said segment beyond 49% and up to 74% is put under the Government route;
(b) The consolidated policy has reduced the FDI ceilings under automatic route in Ground Handling Servicers from 74% to 49%. Further, FDI under the said segment beyond 49% and up to 74% is put under the Government route.
12. The consolidated policy has introduced a new segment under the Broadcasting Service division namely Headend-In-The-Sky (“HITS’) Broadcasting Service. Under the new guidelines total direct and indirect FDI including portfolio investment and FDI in HITS is capped up to 74%. Further, FDI under HITS up to 49 % is put under the automatic route and beyond 49% and up to 74% is put under the government route.
Authors:
Atul Dua (e-mail: atul.dua@sethdua.com) and Sunil Seth (sunil.seth@sethdua.com) are Senior Partners with Seth Dua & Associates, Solicitors & Advocates, India.