Annex VIII.1: Report of the Committee on Capital Account Convertibility: Measures Undertaken

Item

Position at the time of

Recommendation of the

Measures undertaken

Report

Committee

1

2

I.

CORPORATES/ BUSINESS

A.

Corporate/ Business - Residents

1.

Issuing foreign currency bonds to residents and investment in foreign currency bonds and deposits (only rupee settlement)

Not permitted.

To be permitted without any ceiling.

No action taken.

2.

Financial capital transfers abroad including for opening current / chequeable account.

Not permitted.

Tobe allowed in phases with US $ 25,000 per annum in Phase I, US$ 50,000 in Phase II and US$ 1,00,000 per annum in Phase III.

• Listed Indian companies have been permitted to invest abroad in companies listed in recognised stock exchanges, which have a shareholding of at least 10 per cent in an Indian company listed on a recognised stock exchange in India (as on 1^st January of the year of the investment). Such investments shall not exceed 25 per cent of the Indian company’s net worth, as on the date of latest audited balance sheet.

• Indian corporates have been permitted to invest within the respective ceilings as applicable in rated bonds/fixed income securities. The rating should be at least A-1/AAA by Standard and Poor or P-1/Aaa by Moody’s or F1/AAA by Fitch IBCA etc. for short term obligation and corresponding rating for long term ones.

3.

Accessing capital markets abroad through American Depository Receipts (ADRs)/Global Depository

Permitted individually by Government. Approval under FEMA given by the Reserve Bank.

No approval to be taken from the Reserve Bank / Government. Reporting within 30 days of issue.

• Indian companies are allowed to access ADRs/GDRs markets through an automatic route without prior approval of the Ministry of Finance subject to specified norms and post-issue reporting requirements. Others require case by case approval from Government.

• Indian companies have been allowed to retain abroad funds raised through ADRs/GDRs, for any period to meet their future forex requirements and/or pending utilisation of foreign resources raised, the Indian company may invest the foreign currency funds.

Item

Position at the time of Report

Recommendation of the Committee

Measures undertaken

1

2

3

4.

External Commercial Borrowings (ECBs)

ECBs were subject to overall
ceilings and sub-ceilings.

Queuing for purpose of implementing ceiling on ECBs while ensuring that relatively smaller borrowers are not crowded out by a few very large borrowers. No restrictions on end use of funds. Loans for period with average maturity of 10 years and above in Phase I and 7 years and above in Phase II to be kept outside the ceiling.

The new policy announced in January 2004 significantly raised the ceiling under the automatic route from US $50 million. ECBs have now been allowed under an automatic route up to US $ 500 million (for ECBs with average maturity of more than five years) and up to US $ 20 million (for ECBs between three to five years of average maturity). Borrowings which fall outside purview of the automatic route will be subject to a transparent process and will be decided by an Empowered Committee of the Reserve Bank. The above relaxations will also be applicable to Foreign Currency Convertible Bonds (FCCBs).

ADs have been permitted to approve proposals not exceeding US$ 20 million per import transaction for short term credit for financing, by way of either Suppliers’ Credit or Buyers’ Credit, of import into India for a period less than three years.

ECB proceeds have to be parked abroad unless actually required.

5.

Foreign Currency Convertible Bonds (FCCBs) / Floating Rate Notes (FRNs)

Permitted individually by Government within overall ECB ceiling

To be within the ECB ceiling with same procedure viz. queuing vide item 4.

Government has decided to transfer entire work relating to ECB/FCCB/FRN to the Reserve Bank with transparent guidelines. The method for giving clearance by the Reserve Bank is being worked out in detail and a notification is under preparation.

Government of India has allowed Indian companies to prepay the existing FCCBs subject to certain conditions.

Also see 4 above.

6.

Loans from non-residents

Allowed by the Reserve Bank on a case-by-case basis for loans from Non-Resident Indians (NRIs) on non-repatriable basis with restrictions on interest payments and end use.

To be allowed to borrow up to US $ 250,000 per entity in Phase I, US $ 500,000 per entity in Phase II and US $ 1 million per entity in Phase III with payment of interest not exceeding LIBOR without restriction on period of loan, use of funds and repatriation of loan/ interest.

Such loans are governed by ECB guidelines.

Item

Position at the time of Report

Recommendation of the Committee

Measures undertaken

1

2

3

7.

Joint Ventures (JVs)/Wholly Owned Subsidiaries (WOSs) abroad

Proposals for investments up to US$ 4 million were cleared by the Reserve Bank. The extent of outflow is dependent upon the export performance of the Indian promoter and capability for repatriation by way of dividend, etc., within a period of five years. Cases not covered by these criteria were cleared by a Special Committee. Balances in EEFC accounts can be used for investment up to US$ 15 million without the specific approval of the Reserve Bank.

Direct investments abroad to be allowed for ventures up to US $ 50 million by ADs subject to transparent guidelines to be laid down by the Reserve Bank. Above US $ 50 million through a special committee. The current stipulation on repatriation of earnings by way of dividend etc. within a specified time period should be removed. JVs/WOSs can be set up by all parties and not restricted only to exporters / exchange earners.

• Indian parties are allowed to make direct investment a JVs/WOSs outside India without prior approval of Reserve Bank/Government subject to cer conditions.

• The existing ceiling for Indian investment in Myanmar SAARC countries (excluding Pakistan) under the automatic route has been enhanced to US$ 150 million or equivalent.

• The investment may be funded out of EEFC balances 100 per cent of ADRs/GDRs raised by the Indian party. Any Indian company with a proven track record was to invest upto 100 per cent of its net worth by way of purchases for investment in foreign entity engaged in bonafide business entity. The overall limit of US $ 100 has been done away with.

• Investment in overseas financial sector is also permitted subject to certain terms and conditions.

• An Indian party engaged in the activities specified by Reserve Bank is permitted to acquire shares of a company engaged in the similar activity in exchange ADRs/GDRs issued to the latter in accordance with guidelines issued by the Government.

• Investment not covered in any of the permissible requires approval by the Special Committee for overseas investment.

• Resident shareholders of Indian companies, who offer shares for conversion to ADRs/GDRs, have been permitted to receive the sale proceeds in foreign currency. the sale proceeds, so received by residents, are permitted to be credited to their EEFC/RFC (D) Accounts

• Individuals: A person resident in India being an individual is permitted to acquire foreign securities by way of inheritance or under cashless Employees Stock Scheme (ESOP). In addition, employees or directors the Indian office/branch/ subsidiary of a foreign company or an Indian company are permitted to acquire against remittance without any monetary limit.

• The Reserve Bank also allows resident employees software companies to purchase foreign securities the ADR/GDR linked stock option scheme upto consideration not exceeding US $ 50,000 in a block of calendar years.

Item

Position at the time of Report

Recommendation of the Committee

Measures undertaken

1

2

3

Requirement of prior approval by the Reserve Bank may be dispensed with subject to reporting to the Reserve Bank.

8.

Project Exports

Indian project exporters were required to approach the Reserve Bank for prior approval for a variety of purposes while executing the projects abroad.

• Where export of goods or services is proposed to be made on deferred payment terms or in execution of a turnkey project or a civil construction contract, the exporter is required to submit the proposal for prior approval of the approving authority, before entering into such export arrangement. Approving authority considers the proposal in accordance with the guidelines issued by the Reserve Bank from time to time.

• Remittances towards opening of offices abroad is classified as a transaction of current account nature. General permission to open/maintain foreign currency account has been granted subject to cer tain conditions.

• Indian corporates who have set up overseas offices have been allowed to acquire immovable property outside India for their business as well as for staff residential purposes.

• There are two categories of EEFC account holders, one those who can retain up to 100 per cent of their receipt in foreign exchange and others who can retain 50 per cent. A 100 per cent Export Oriented Unit (EOU) or a unit situated in (a) Export Processing Zone (EPZ) or (b) Software Technology Park (STP) or (c) Electronic Hardware Technology Park (EHTP), status holder exporters, professionals are eligible to credit up to 100 per cent of their foreign exchange receipts to their EEFC account.

• On application, the corporates are permitted to credit higher than the permissible percentage of export proceeds to their EEFC account on a case-to-case basis to enable them to take advantage of lower interest rates and prepay the ECB

9.

Establishment of offices abroad

Powers given to ADs to allow remittances for exporters with an average annual export turnover of Rs.150 lakhs and above to open representative/non-trading offices. Further, EEFC account holders were permitted to utilise their EEFC balance without any restriction for establishing any type of offices. Other cases required the Reserve Bank’s approval.

Any corporate entity may open offices abroad without the need for prior approval from the Reserve Bank. Capital expenditure towards opening of the offices and current expenditure for maintenance could be subject to overall value limits to be allowed by ADs.

10.

EEFC accounts for exporters and exchange earners

50 per cent for EOUs and 25 per cent for others - restrictions on use of funds for current account and permitted capital account transactions.

100 per cent of earnings for all exporters/exchange earners to be allowed to be held in EEFC accounts in India. Use of funds allowed for current and permitted capital account transactions with cheque writing facility in Phase I and II.In Phase III, EEFC accounts can be held with banks outside India at the option of the exporter and exchange earners.

Item

Position at the time of Report

Recommendation of the Committee

Measures undertaken

1

2

3

B.

Corporates-Non-Residents (including OCBs)

1.

Foreign Direct Investment (FDI)

Overseas Corporate Bodies (OCBs) were allowed facilities similar to NRIs. Other corporates were allowed to invest up to various proportions with the Reserve Bank/Government approval under the FDI policy of the Government.

Prior approval of the Reserve Bank not required for FDI.Reporting by ADs to the Reserve Bank.

• Government has since substantially expanded foreign investment under the 'Reserve Bank’s Automatic Route' to include all items/activities, except certain items, (i.e., 6 prohibited items and 12 items included in the negative list) for investment under FDI/NRI/OCB investment. However, sectoral caps continue to apply. Investment under automatic route requires reporting of the transaction to the Reserve Bank within 30 days. Investment exceeding these sectoral caps or investment in sectors in the negative list requires approval from Foreign Investment Promotion Board (FIPB). OCB has been derecognised as a class of investor since September 16, 2003.

• Registered Foreign Venture Capital Investors (FVCIs) have been permitted to invest in Indian Venture Capital Undertakings/ Venture Capital Funds.

• An Indian company may sponsor issue of ADRs/GDRs with an overseas depository against shares held by its shareholders at a price to be determined by a lead manager subject to certain conditions.

• Existing non-resident shareholders have been permitted to apply for issue of additional equity shares or preference shares or convertible bonds over and above their rights entitlement, subject to sectoral caps.

2.

Portfolio Investment in India through stock exchanges in shares/debentures.

Allowed within the 24 per cent limit (can be increased to 30 per cent at the option of the company) which includes portfolio investment by NRIs, Foreign Institutional Investors (Flls) and OCBs subject to approval by the Reserve Bank which is valid for a period of five years.The investment restricted to one percent by individual NRIs/OCBs and 10 per cent by individual FIIs. Corporates, other than OCBs and FIIs were not permitted.

To be allowed to all non-residents without prior approval by the Reserve Bank.Designated ADs should be required to report to the Reserve Bank.

• An NRI is permitted to purchase/ sell shares and/or convertible debentures of an Indian company through a registered broker on a recognised stock exchange provided:
  
  i) The NRI routes all his transactions through designated branch of an AD in India.
  ii) The paid-up value of shares purchased by NRIs, on individual basis, both on repatriation/non-repatriation basis does not exceed 5 per cent of the total paid-up capital of the company concerned.
  iii) The paid-up value of each series of convertible debentures both on repatriation/non-repatriation basis does not exceed 5 per cent of the total paid-up value of each series of the convertible debentures of the company concerned.
  iv) The aggregate paid-up value of shares of the company purchased by NRIs does not exceed 10 per cent of the total paid-up capital and in the case of convertible debentures, the aggregate paid-up value of each series of debentures purchased by NRIs does not exceed 10 per cent of the total paid-up value of each series of the convertible debentures of the concerned company.
  v) The above ceilings of 10 per cent can be raised to 24 per cent if a Special Resolution to that effect is passed by the General Body of the Indian company concerned.
  vi) The facility to FIIs/NRIs and FVCIs to purchase shares or convertible debentures of an Indian company, which is engaged in print media sector has been withdrawn. The restriction is also applicable to purchase of shares and convertible debentures of NRIs on non-repatriation basis.

Item

Position at the time of

Report

Recommendation of the

Committee

Measures undertaken

1

2

3

4

3.

Disinvestment

Disinvestment as approved by the Reserve Bank except where sales are made through stock exchanges under portfolio investment scheme.

RBI approval to be dispensedwith.

• Action deferred

II. BANKS

A.

Banks - Residents

1.

Loans and borrowings from overseas banks and correspondents including overdrafts in nostro accounts.

ADs were permitted to borrow up to US $ 10 million from their overseas offices/ correspondents without any conditions on end use and repayment of such borrowings.

(i) Each bank may be allowed to borrow from overseas markets, short-term (up to one year) and long-term (over one year), to the extent of 50 percent of the unimpaired Tier I capital with a sub limit of one third (i.e., 16.67 per cent of unimpaired Tier I capital) for short-term borrowings. Ceilings to be raised progressively in Phases II and III.

(ii) No restrictions on use of funds and repayment. Prudential norms regarding open position and gap limits to continue.

• ADs in India are permitted to borrow in foreign currency as given below subject to certain conditions:
  i) From its head office or branch or correspondents outside India upto 25 per cent of its unimpaired Tier I capital or US $ 10 million, whichever is more.
  ii) From the head office or branch or correspondents outside India without limit for the purpose of replenishing rupee resources (not for investment in call money or other markets).
  iii) Lines of credit from a bank / financial institution outside India without any limit for the purpose of granting pre-shipment are post-shipment credit to its constituents.
  iv) A branch outside India of an AD may borrow in foreign currency in the normal course of its banking business outside India.

Investments in overseas markets

• ADs have been given freedom to under take investments in overseas markets subject to the limits approved by the banks’ Board of Directors. Such investments may be made in overseas money market instruments and/or debt instruments issued by a foreign state with a residual maturity of less than one year and rated at least AA(-) by Standard and Poor / Fitch-IBCA or Aa3 by Moody’s.

• Banks in India have the freedom to invest theundeployed FCNR(B) funds in overseas markets in long-term fixed income securities rated at least AA(-) by Standard and Poor, or Aa3 by Moody’s or AA by Fitch IBCA.

Item

Position at the time ofReport

Recommendation of the Committee

Measures undertaken

1

2

3

4

• Indian commercial banks are allowed to extend credit/non-credit facilities (viz., letters of credit and guarantees) to Indian JVs/WOSs abroad subject to certain conditions (i.e., up to 10 per cent of Tier I Capital).

4.

• Commercial banks have been permitted to provide, at their discretion, buyers credit/acceptance finance to overseas parties for facilitating exports of goods and services from India subject to certain conditions.

5.

Accept deposits and extend loans denominated in foreign currencies from /to individuals (only rupee settlement).

Not allowed other than under existing foreign currency deposit schemes.

To be allowed without any ceilings assets/liabilities mismatch to be taken into overall open position/gap limits.

• The facility of foreign currency loans in India against the security of funds held in FCNR (B) deposit account to the account holders only, subject to certain conditions, hasbeen extended.
• RFC(D) Account can be credited with/opened out of foreign exchange earned and/or gifts received from close relatives (as defined in the Companies Act) and repatriated to India through normal banking channels by resident individuals. Foreign exchange earnings could be through export of goods and/or services, royalty, honorarium, etc.

6.

Forfaiting

EXIM Bank alone was permitted by the Reserve Bank to do forfaiting

All ADs should be permitted to undertake forfaiting.

• ADs have been permitted to introduce scheme of forfaiting of medium term export receivables on lines similar to the scheme operated by EXIM Bank.