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Funding by Foreign Holding Company

G.Veerabadran (Chartered Accountant) (67 Points)

15 September 2009

Foreign Company holds 99% Equity holding in a Indian

Private Limited Company. The funding is from foreign company.

1) How to treat this ( unsecured loan?)

2) What is the RBI circular or FEMA guidlines.

3) Procedure and the retuns to filed with RBI.

Please clarify

regards

G.Veerabudran

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8 Replies

suresh saini (CA-FINAL) (76 Points)
Replied 15 September 2009

its depend on the type of the transaction

if holding co. invest in indian subsidairy co. then intiment to RBI and allotment shares within six month from recpt. of fund.

if transaction is type of the unsecured loan then not require any statutory compilance.

Ashis Mahapatra (Consultant-Tax & FEMA/FDI) (183 Points)
Replied 15 September 2009

Dear Mr Veerabadran

Ref to your query,

Funding may be in the form of Equity/Pref, FCCB , ECB or Trade credit.These are governed by different regulation of FEMA/FDI.If you have already brought the foreign fund to your bank a/c then it will be taken for the end use purpose that it is mentioned in the face of FIRC and you have to show it that only.

But loan for some specific nature of enduse[ like purchase of raw materials/working capital] are prohibited and some enduse subject to some conditions like repayment period, rate of interests, nature of industry, paking in/outside India etc.These are further devided in aproval route or automatic route.some cases automatic is not treated automatic unless you comply with the prior intimation to RBI within due dates.

Similarly share application money for equity participation guided by FDI policy which allow up to a specific limit on sector specific beyond which aproval is required.Even the sector/sectorial cap fall under automatic, strict compliances required for money received in forex .

So its a exhustive study which count lot of factors.Non observance of said condition or not intimation to RBI or raising fund without aproval is contravenion of FEMA and the RBI can take severe action sometimes.

Luking to your query its not possible to give a clear sugession .If you provide the details like the nature mentioned in FIRC,nature of industry, date on which money received in India,agreement if any bet two party ,enduse of this fund etc..someone will be in a better position to advise on this.

FOR YOUR KIND INFORMATION ,PRESENTLY MANY SMALL/MID SIZE COMPANIES ARE RAISING FOREIGN FUND.BUT DUE TO LACK OF COORDINATION/ADVISORY FROM THEIR AUTHORISED DEALER THEY VIOLATE FEMA AND PAY HUGE PENALTY AT LATTER TIME WHEN THE AD BANK PASS ON THE FAULT TO COMPANYS HEAD.SO IF ITS LIKELY FELT IS THERE ANY CONFUSION BETER TO CONSULT SOMEONE N SUOMOTO INTIMATE THE AUTHORITY TO AVOID UNDUE HARDHIP LATER.

sudarshan (CA) (745 Points)
Replied 15 September 2009

There is no prohibition in taking loan from holding company as per FEMA , as the amount is borrowed from shareholder only.

Ashis Mahapatra (Consultant-Tax & FEMA/FDI) (183 Points)
Replied 15 September 2009

Originally posted by :sudarshan

Hi freinds Pls read thoroughly ECB Master circular on this link [copy paste to ur browser] https://rbi.org.in/scriptts/BS_ViewMasCirculardetails.aspx?id=5116 or the pdf attached here.

part of this terms n conditions pasted here---

(a) Corporates including those in hotel, hospital, software sectors (registered under the Companies Act, 1956 except financial intermediaries, such as banks, financial institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) are eligible to raise ECB. Individuals, Trusts and Non-Profit making organizations are not eligible to raise ECB.

(b) Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area.

(c) Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to avail ECB. Such NGO (i) should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange and (ii) would require a certificate of due diligence on `fit and proper’ status of the Board/Committee of management of the borrowing entity from the designated AD bank. i ) Eligible Borrowers

ii) Recognized Lenders

Eligible borrowers can raise ECB from internationally recognized sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC, etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators, and (vii) foreign equity holders (other than erstwhile Overseas Corporate Bodies). A "foreign equity holder" to be eligible as “recognized lender” under the automatic route would require minimum holding of paid up equity in the borrower company as set out below:

(i) For ECB up to USD 5 million - minimum paid up equity of 25 per cent held directly by the lender ; and

(ii) For ECB more than USD 5 million - minimum paid up equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding)

Overseas organizations and individuals complying with following safeguards may provide ECB to Non-Government Organizations (NGOs) engaged in micro finance activities.

(a) Overseas Organizations proposing to lend ECB would have to furnish to the AD bank of the borrower a certificate of due diligence from an overseas bank which in turn is subject to regulation of host-country regulator and adheres to the Financial Action Task Force (FATF) guidelines. The certificate of due diligence should comprise the following (i) that the lender maintains an account with the bank for at least a period of two years, (ii) that the lending entity is organised as per the local law and held in good esteem by the business/local community, and (iii) that there is no criminal action pending against it.

(b) Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents, such as audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not eligible to extend ECB.

iii) Amount and Maturity

(a) The maximum amount of ECB which can be raised by a corporate other than those in the hotel, hospital and software sectors is USD 500 million or its equivalent during a financial year.

(b) Corporates in the services sector viz. hotels, hospitals and software sector are allowed to avail of ECB up to USD 100 million or its equivalent in a financial year for meeting foreign currency and / or Rupee capital expenditure for permissible end-uses. The proceeds of the ECBs should not be used for acquisition of land.

(c) NGOs engaged in micro finance activities can raise ECB up to USD 5 million or its equivalent during a financial year. Designated AD bank has to ensure that at the time of drawdown the forex exposure of the borrower is fully hedged

(d) ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years.

(e) ECB above USD 20 million or its equivalent and up to USD 500 million or or its equivalent with a minimum average maturity of five years.

(f) ECB up to USD 20 million or its equivalent can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option.

iv) All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. However, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

The all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings are valid until reviewed:

Average Maturity Period	All-in-cost Ceilings over 6 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

v) End-use

(a) ECB can be raised only for investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units] in the real sector - industrial sector including small and medium enterprises (SME), infrastructure sector and specific service sectors, namely hotel, hospital and software - in India. Infrastructure sector for the purpose of ECB is defined as (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, refining and exploration.

(b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

(c) Utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.

(d) Payment for obtaining license/permit for 3G Spectrum.

(e) For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities.

(f) Premature buyback of FCCBs (facility is available up to December 31, 2009), subject to compliance with the terms and conditions detailed in Para A (x) (b) ibid.

vi) End-uses not permitted

(a) For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate.

(b) In real estate sector.

(c) For working capital, general corporate purpose and repayment of existing Rupee loans.

vii) Guarantees

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

viii) Security

The choice of security to be provided to the lender/supplier is left to the borrower. However, creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000, respectively, as amended from time to time. AD Category - I banks have been delegated powers to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower.

Before according ‘no objection’ under FEMA, 1999, AD Category - I banks should ensure and satisfy themselves that (i) the underlying ECB is strictly in compliance with the extant ECB guidelines, (ii) there exists a security clause in the loan agreement requiring the borrower to create charge on immovable assets / financial securities / furnish corporate or personal guarantee, (iii) the loan agreement has been signed by both the lender and the borrower, and (iv) the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank.

On compliance with the above conditions, AD Category - I banks may convey their ‘no objection’, under FEMA, 1999 for creation of charge on immovable assets, financial securities and issue of personal or corporate guarantee, subject to the conditions indicated below:

a) The ‘no objection’ for creation of charge on immovable assets may be conveyed under FEMA, 1999 either in favour of the lender or the security trustee, subject to the following conditions:

(i) ‘No objection’ shall be granted only to a resident ECB borrower.

(ii) The period of such charge on immovable assets has to be co-terminus with the maturity of the underlying ECB.

(iii) Such ‘no objection’ should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender / security trustee.

(iv) In the event of enforcement / invocation of the charge, the immovable asset (property) will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

b) AD Category – I banks may convey their 'no objection' under FEMA, 1999 to the resident ECB borrower for pledge of shares of the borrowing company held by promoters as well as in domestic associate companies of the borrower to secure the ECB subject to the following conditions:

(i) The period of such pledge shall be co-terminus with the maturity of the underlying ECB.

(ii) In case of invocation of pledge, transfer shall be in accordance with the extant FDI policy.

(iii) A certificate from the Statutory Auditor of the company that the ECB proceeds have been / will be utilized for the permitted end-use/s.

c) The ‘no objection’ to the resident ECB borrower for issue of corporate or personal guarantee under FEMA, 1999 may be conveyed after obtaining –

(i) Board Resolution for issue of corporate guarantee from the company issuing such guarantees, specifying names of the officials authorised to execute such guarantees on behalf of the company or in individual capacity.

(ii) Specific requests from individuals to issue personal guarantee indicating details of the ECB.

(iii) Ensuring that the period of such corporate or personal guarantee is co-terminus with the maturity of the underlying ECB.

AD Category – I banks may invariably specify that the ‘no objection’ is issued from the foreign exchange angle under the provisions of FEMA, 1999 and should not be construed as an approval by any other statutory authority or Government under any other law/ regulation. If further approval or permission is required from any other regulatory / statutory authority or Government under the relevant laws / regulations, the applicant should take the approval of the authority concerned before undertaking the transaction. Further, the 'no objection' should not be construed as regularizing or validating any irregularities, contravention or other lapses, if any, under the provisions of FEMA or any other laws or regulations.

ix) Parking of ECB proceeds

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses.

ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s, (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (c) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.

ECB funds may also be remitted to India for credit to the borrowers’ Rupee accounts with AD Category - I banks in India, pending utilization for permissible end-uses.

x) Prepayment

(a) Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of the Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

(b) Buyback of FCCB: The designated AD Category - I banks may allow Indian companies to prematurely buyback FCCBs, subject to compliance with the terms and conditions as under:
i) the buyback value of the FCCB shall be at a minimum discount of 15 per cent on the book value;

ii) the funds used for the buyback shall be out of existing foreign currency funds held either in India (including funds held in EEFC account) or abroad and / or out of fresh ECB raised in conformity with the current ECB norms; and

iii) where the fresh ECB is co-terminus with the outstanding maturity of the original FCCB and is for less than three years, the all-in-cost ceiling should not exceed 6 months Libor plus 200 bps, as applicable to short-term borrowings. In other cases, the all-in-cost for the relevant maturity of the ECB shall apply.

The entire procedure of buyback should be completed by December 31, 2009. In addition to the conditions set out above, the following additional conditions shall be applicable:

(i) The FCCB should have been issued in compliance with the extant guidelines.

(ii) The FCCB should have been registered with the Reserve Bank; the LRN number obtained and ECB 2 returns submitted up to date.

(iii) No proceedings for contravention of FEMA are pending against the company.

(iv) The right for buyback is vested with the issuer of FCCBs. However, the actual buyback is subject to the consent of the bond holders.

(v) The FCCBs bought back / repurchased from the holders must be cancelled and should not be re-issued or re-sold.

(vi) The buyback will not have any effect on the bond holders not opting for the buyback or on the non-participating bond holders of companies opting for the buyback.

(vii) The Indian company shall open an escrow account with the branch or subsidiary of an Indian bank overseas or an international bank for buying back the FCCBs to ensure that the funds are used only for the buyback.

(viii) On completion of the buyback, a report giving details of buyback, such as, the outstanding amount of FCCBs, book value of FCCBs bought back, rate at which FCCBs bought back, amount involved, and source/s of funds may be submitted, through the designated AD Category - I bank, to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, ECB Division, Central Office, 11th Floor, Central Office Building, Shahid Bhagat Singh Road, Mumbai-400 001.

xi) Refinancing of an existing ECB

The existing ECB may be refinanced by raising a fresh ECB subject to the conditions that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.

xii) Debt Servicing

The designated Authorised Dealer bankshas the general permission to make remittances of installments of principal, interest and other charges in conformity with ECB guidelines, issued by Government / Reserve Bank of India from time to time.

xiii) Procedure

Borrowers may enter into loan agreement with recognised lender for raising ECB under Automatic Route complying with the ECB guidelines without prior approval of the Reserve Bank. The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank before drawing down the ECB. The procedure for obtaining LRN is detailed in II (i) (b).

Ashis Mahapatra (Consultant-Tax & FEMA/FDI) (183 Points)
Replied 15 September 2009

Originally posted by :sudarshan
"	The Master circular pdf is here	"

Attached File : 19 ecb.pdf downloaded: 828 times

Mahendra (Finance Mgr) (26 Points)
Replied 04 January 2011

Hi Ashish,

One quick Question about the Share Capital Subscripttion by the foreign holding company in an Indian Company located in an SEZ area. When the Foreign holding company send the Funds to Indian company for Share capital subscripttion can they send the funds in INR or It must come in Foreign currency to Indian Company's Bank account. In other words can the Conversion of Forex to INR take place outside India or The conversion has to be the Indian Companies Bank in India ? Please advise. Many Thanks in advance for your time & advise.