FDI Norms in Loan Company and Compliance under FEMA

Narendra Kumar

13 Jul, 2020

Foreign Direct Investment Norm (FDI)

Foreign Direct Investment norm is an investment made by the person resident outside India through the capital instrument.

Investment can be made only in:

• In an unlisted Indian company.
• In 10 percent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company.

A route for the Foreign Investment

1. Automatic Route: Under the Automatic Route, Foreign Direct Investment is allowed without taking the Prior Approval of the Reserve Bank of India, in all activities/ sectors as specified under the FEMA Act.
2. Government Route: Foreign Direct Investment which is not covered under the automatic route is covered under the Government route, which requires the prior approval of the Government of India.

Procedure for applying for Government approval is given at http://fifp.gov.in/Forms/SOP.pdf.

FDI in Loan NBFC

After the liberalization policy introduced by the Government of India in 1991, India has seen the tremendous growth in the financial sector. Foreign Investors are keen to invest in India.

FDI is regulated by the Foreign Exchange Management Act, 2000 and Loan NBFCs are operated by the Reserve Bank of India within the framework of the RBI Regulation Act 1934.

Subject to the minimum capitalization requirement as issued by the Government of India, Foreign Direct Investment norm up to 100% is allowed in NBFC.

“The Reserve Bank of India (RBI) has released a notification dated 9 September 2016 to amend the Foreign Exchange Management (Transfer and Issue of Securities to Persons Resident Outside India) Regulations, 2000 (TISPRO), to further relax foreign investments in the ‘non-banking financial services’ sector (Notification).”

Liberalization of FDI in the financial services sector and the expected boost in the sector. It will give benefit to domestic finance companies which may now raise foreign capital under fund management a relaxed regime, without adhering to the previously prescribed minimum capitalization norms. The new foreign direct investment norm would also further the intent of the Government to encourage global fund managers to operate out of India.

Foreign Loans and NBFC

When nonresident gives loan in India in the foreign currency, it is referred to as External Commercial Borrowings (ECB).

ECB can be made in one of the following forms:

1. Bank Loans
2. Securitized instruments
3. Buyer’s Credit
4. Supplier’s credit
5. Foreign Currency Convertible Bonds (FCCB)
6. Financial lease
7. Foreign currency Exchange Bonds (FCEBs)

All the forms of borrowings can be availed under automatic route and approval route, Except FCEBs; it can only be issued through approval route only.

Redemption Period and Interest

“There are certain rules and restriction regarding the maturity period and the amount of interest to be paid mentioned in Foreign Exchange Management Regulation for the External Commercial Borrowing (ECB).” It also includes the cost of interest charged by the bank, other fees and expenses paid in foreign direct investment norm loans. It must be within the limit which is measured with respect to a reference rate called the LIBOR or London Interbank Offered Rate.

• For the loan, In the case of average maturity period is 3-5 years, its interest would be 3.5% over six months the LIBOR and
• For the loan, In the case of average maturity Period after more than 5 years, its interest ceiling would be plus 5% over the six month LIBOR.”

Reporting Requirement

(1) Advance Remittance Form (ARF): An Indian company which has received the consideration from outside against the capital Instrument issued. For such FDI, an Indian company shall report such receipts in ARF to the regional office of the RBI within 30 days of the consideration.

(2) FC-GPR: An Indian Company who has issued the capital Instrument to a person resident outside India shall report such issue in FORM FC-GPR to the regional office concerned of the Reserve Bank under whose jurisdiction the registered office of the company operates within 30 days of the issue of securities.

(3) Annual Return on Foreign Liabilities and Assets (FLA): An Indian company which has received the FDI in the form of  capital contribution from the person resident outside India in the Previous Year (S) including the current year, should submit form FLA to the Reserve bank of India on or before 15^th day of July every year.

(4) FC-TRS: It shall be filed at the time of transfer of capital Instrument between the person resident outside India to India within 60 days of receiving the consideration.

Reporting Requirement in Case of ECB

1. Loan Registration Requirement (LRN): If an Indian company has to obtain ECB then, it is prerequisite to take the Loan registration number from Reserve Bank of India.

For which the borrower needs to file FORM 83 which should contain the terms & Conditions of the ECB, in duplicate to the designated AD  category –I bank and Authorized Dealer category –I will forward one copy to the Department of Statistics and Information Management (DSIM), Reserve Bank of India.

2. Alteration in terms and conditions of ECB: If there is any alteration in the terms & conditions of ECB parameters it should be reported to the DSIM through revised Form 83 at the earliest, in any case not later than 7 days from the change effected.
3. Reporting of actual transactions: The borrowers are required to file the return to show the ECB transactions in the form ECB-2 on the monthly basis within seven working days from the close of the month.
4. Reporting on account of the conversion of ECB into Equity: ECB can be converting whether in full or in part.
5. In case of Partial conversion: For the part of the converted portion, FC-GPR is required to be filed to the concerned Regional office of the Foreign Exchange Department of RBI in case of FC-GPR and for the rest of ECB reporting should be made on the monthly basis in ECB-2 stating “ECB Partially converted to equity”.
6. For full conversion, the entire portion is reported in FC-GPR and for ECB reporting should be made to DSIM in ECB -2 stating “ECB fully converted to Equity”. A subsequent filing is not required.