The Legal 500

Exchange Control

 

Liberalization of Foreign Technology Agreement policy

 

Ministry of Commerce and Industry, GOI, has on December 16, 2009 issued Press Note No.8 (2009 Series) for the liberalization of outbound remittances made for technology collaborations and use of trademarks and brand name, by removing the earlier limits. The remittance for royalties and lump sum fees paid towards transfer of technology, use of trademark and brand name would henceforth be permitted under the automatic route, i.e. without any approval of GOI. Indian companies will now have to directly approach their designated Authorised Dealers (“AD”) with necessary documentation, for payment to foreign technical collaborators. Accordingly, the previous Press Note (Press Note 2 (2003) which provided for the limit on the payment of royalty (5 per cent on domestic sales / 8 per cent on exports) and payment of technical fee (US$ 2 million) has been superseded. The GOI would separately notify suitable post-reporting system for technology transfer / collaborations and use of trade mark / brand name.

 

Certain important and recent legal developments in this area are set out below.

 

Exchange Control

 

Liberalization of Foreign Technology Agreement policy

Ministry of Commerce and Industry, GOI, has on December 16, 2009 issued Press Note No.8 (2009 Series) for the liberalization of outbound remittances made for technology collaborations and use of trademarks and brand name, by removing the earlier limits. The remittance for royalties and lump sum fees paid towards transfer of technology, use of trademark and brand name would henceforth be permitted under the automatic route, i.e. without any approval of GOI. Indian companies will now have to directly approach their designated Authorised Dealers (“AD”) with necessary documentation, for payment to foreign technical collaborators. Accordingly, the previous Press Note (Press Note 2 (2003) which provided for the limit on the payment of royalty (5 per cent on domestic sales / 8 per cent on exports) and payment of technical fee (US$ 2 million) has been superseded. The GOI would separately notify suitable post-reporting system for technology transfer / collaborations and use of trade mark / brand name.

The payments would, however, be subject to the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (“Current Account Transaction Rules”) of the GOI. The GOI is yet to notify the necessary changes to the Current Account Transaction Rules which still provide for the limits on the payment of royalty of 5 per cent on domestic sales / 8 per cent on exports and payment of technical fee (US$ 2 million). These changes are likely to be notified very soon.

External Commercial Borrowing Policy amended 

RBI has brought in changes to the existing policy governing External Commercial Borrowings (“ECB”). 

The present policy governing ECB under the approval route permits eligible borrowers to raise funds as ECB from recognized lenders at a mutually agreed rate. This relaxation was available until December 31, 2009 only. The RBI has done away with this relaxation from January 01, 2010 and has fixed all-in-costs ceilings under approval route for loan agreements entered into on or after January 01, 2010 as under:

 

Average Maturity Period	All -in-cost Ceilings over six month Libor*
Three years and up to five years	300 basis points
More than five years	500 basis points
*for the respective currency of borrowing or applicable benchmark.

Where, an eligible borrower intends to avail of ECB after December 31, 2009, and has entered into the loan agreement on or before December 31, 2009 (with the all-in-cost ceiling exceeding the above limits), the borrower should furnish a copy of the loan agreement to the RBI and his application would be considered under the approval route.

Respite for Infrastructure Sector 

Presently, a body corporate may raise funds for the development of integrated township as it is a permitted end use until December 31, 2009. RBI has permitted corporates to avail ECB for the development of integrated townships for another 12 months until December 31, 2010. 

Further, the current policy allows Non-Banking Financial Companies (“NBFC”) exclusively involved in financing infrastructure sector, to raise ECB only from multilateral or regional financial institutions and from developmental financial institutions owned by the government for on-lending to the borrowers in the infrastructure sector. 

The Amendment has dome away with this restriction and NBFC’s involved exclusively in infrastructure sector can now borrow from any eligible lender under the approval route.  Under the approval route, the eligible lenders are (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators, and (vii) foreign equity holders. However, the borrowing NBFCs must comply with the prudential standards applicable and also fully hedge the currency risk with respect to the funds borrowed. 

 RBI has also permitted buyback of Foreign Currency Convertible Bonds (“FCCBs”) from the proceeds of ECB, where the entire process of FCCB buyback was to be completed by March 31, 2009. Subsequently, RBI permitted FCCB buyback until December 31, 2009. Finally, RBI has discontinued this facility from January 01, 2010.

Thrust to Telecom Sector 

With the impending spectrum auctions, payment for acquiring 3G spectrum was already a permissible end use under the existing ECB policy. However there was no clarity on whether payment for Broadband Wireless Access (“BWA”) spectrum would also be a permitted end use. The Department of Telecommunication’s (“DoT”) ‘Information Memorandum’ provided that acquisition of BWA spectrum would also be covered. The amendment permits eligible borrower under the telecommunication sector to avail ECB for the purpose of payment for spectrum.  It is understood that spectrum would also include BWA spectrum. However a specific mention of BWA would have been helpful in bringing certainty. 

Branch /Liaison Office in India - Change in Regulatory Compliances 

RBI has simplified processes pertaining to opening of BO / LO by foreign entities in India vide its circular, dated December 30, 2009. The new guidelines are effective from February 01, 2010. Henceforth, for setting-up BO/LO in India, the foreign entities have to submit applications in this regard to the designated AD, which shall verify, recommend and forward the same to the RBI.  Further the RBI has decided to allot a Unique Indication Number (“UIN”) to both the existing as well as new LO/BOs. This UIN is required to be quoted in all future references made to the RBI by the LO/BO/ designated AD bank. In furtherance to this the RBI has delegated the following powers on the designated AD Category -1 banks:

 

 i.      Extension of LO: With effect from February 01,2010, LO can seek an extension for a period of 3 years from the date of  expiry of the original approval/extension granted by the RBI, by applying to the AD. The AD can verify and directly permit an extension.

 

ii.     Closure of LO/BO: With effect from February 01, 2010, the work related to closure of BO/LO hitherto being done by the RBI, shall be directly handled by the AD Bank. If necessary documentation is in place, AD will permit repatriation of funds lying in the banks account.

 

iii.    Activity Report: With effect from February 01, 2010, the Annual Activity Certificate, till now submitted with the RBI will henceforth be submitted with the AD and with the Directorate General of Income Tax (International Taxation). Reporting of Permanent Account Number is also made mandatory in the Annual Activity Certificate.

 

 

Authors:

Atul Dua (atul.dua@sethdua.com) and Sunil Seth (sunil.seth@sethdua.com) are Senior Partners with Seth Dua & Associates, Solicitors & Advocates, India .

 

www.sethdua.com