25 January, 2016
Subscription to National Pension System by Non Resident Indians
The Reserve Bank of India (‘RBI’) has, by way of a circular dated October 29, 2015, permitted the National Pension System (‘NPS’) as an investment option for Non-Resident Indians (‘NRI’) so as to enable NRIs to access old age income security in India. NRIs may subscribe to NPS, governed and administered by the Pension Fund Regulatory and Development Authority, provided such subscriptions are made through normal banking channels and the person is eli- gible to invest as per the provisions of the Pension Fund Regulatory and Development Author- ity Act, 2013. The subscription amounts are to be paid by the NRIs either by inward remittance through normal banking channels or out of funds held in their NRE/FCNR/NRO account. There is no restriction on repatriation of the annuity/accumulated savings.
Reporting by Limited Liability Partnerships (‘LLPs’) on Annual Return on Foreign Liabilities and Assets (‘FLA Return’)
The RBI has, by way of a circular dated October 21, 2015, specified that all LLPs that have received foreign direct investment (‘FDI’) and/or made overseas investment in the previous year(s) as well as in the current year, are required to submit the FLA Return for all such years to the RBI annually by July 15, in the format prescribed by the RBI by a circular dated June 18, 2014.
Investment by FPI in Corporate Bonds
The RBI has, by way of a circular dated November 26, 2015, permitted FPIs to acquire non- convertible debentures (‘NCDs’)/bonds, which are under default, either fully or partly, in the re- payment of principal on maturity or principal installment in the case of amortising bonds. The revised maturity period of such NCDs/bonds, is required to be three years or more. Additionally, FPIs are required to disclose to the debenture trustees the terms of their offer to the existing de- benture holders / beneficial owners from whom such NCDs/bonds are proposed to be acquired. Further, such investment is required be within the overall limit prescribed for corporate debt from time to time (which as on the date of this circular was ¤2443.23 billion (approximately US$ 36.50 billion)).
Amendments to Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004
The RBI has, by way of a circular dated December 2, 2015, amended the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (‘ODI Regulations’). Regulation 21 of the ODI Regulations prescribes the terms and conditions pursuant to which a person resident in India being an Indian company or a body corporate created by an act of the Parliament is permitted to issue Foreign Currency Convertible Bonds (‘FCCBs’). Pursuant to the said amendment, a proviso has been inserted after Regulation 21(2)(ii) of the ODI Regula- tions permitting the RBI, in consultation with the Government of India (‘GoI’), to change or prescribe any provision for the issuance of FCCBs, under the automatic as well as approval route. Additionally, a proviso has been included after Regulation 21(2)(iii) of the ODI Regulations per- mitting the RBI, in consultation with GoI, to change or prescribe any provision for the issuance of Foreign Currency Exchangeable Bonds.
The RBI has, by way of a circular dated December 2, 2015, amended the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 by adding a pro- viso to paragraph 3 and paragraph 5 in Schedule I (Borrowings in Foreign Exchange under the Automatic Route) and Schedule II (Borrowings in Foreign Exchange under the Approval Route) respectively of these regulations, which stipulate that RBI may, in consultation with GoI, pre- scribe any provision or proviso regarding various parameters listed in the relevant Schedules or any parameter prescribed by the RBI, along with the date from which any or all of the existing parameters or provisos will cease to exist. This enabling clause will apply to parameters and provisos in respect of borrowings from overseas, whether in foreign currency or Indian Rupees, such as addition/deletion of categories of borrowers eligible to raise such borrowings, overseas lenders/investors, purposes of such borrowings, change in amount, maturity and all-in-cost, norms regarding security, pre-payment, parking of ECB proceeds, reporting and drawal of loan, refinancing, debt servicing, etc.
Extension of Credit Facilities to Overseas Step-down Subsidiaries of Indian Companies
The RBI, by its circular dated December 31, 2015 (‘2015 Circular’), has revised the regu- lations relating to funded and non-funded credit facilities to step-down overseas subsidiaries of Indian companies by banks in India. The 2015 Circular modifies the erstwhile instructions issued by its circular of May 10, 2007 (‘2007 Circular’), which permitted banks in India to ex- tend such facilities to wholly owned step-down subsidiaries of foreign subsidiaries of Indian companies (where the holding by the Indian company exceeded 51%). In accordance with the 2015 Circular, banks in India are now permitted to extend funded and non-funded credit fa- cilities to step-down subsidiaries of Indian companies, including to such subsidiaries beyond the first level, to finance projects undertaken abroad. The 2015 Circular also prescribes addi- tional conditions for the extension of credit to such subsidiaries of Indian companies, relating to the shareholding structure of the immediate overseas subsidiary of the Indian company and the overseas step-down subsidiary that proposes to avail such financing from the Indian bank, which are as follows:
- The immediate overseas subsidiary of the Indian company must be directly controlled by the Indian parent company through any of the modes of control recog- nised under the Indian Accounting Standards (i.e. ownership, directly or indirect- ly through subsidiary(ies), of more than half of the voting power or control of the composition of the board of directors). In addition, the Indian parent company must directly hold a minimum 51% of the subsidiary’s shareholding.
- All step-down subsidiaries, including intermediate ones, have to be wholly owned subsidiaries of the immediate parent company, or their entire share capital must be jointly held by the immediate parent company and the Indian parent company and/or its wholly owned subsidiary. The immediate parent is required to, wholly or jointly with Indian parent company and/or its wholly owned subsidiary, have control over the step-down subsidiary.
Further, banks providing such financing to overseas step-down subsidiaries of Indian companies are required to make additional provision of two per cent (in addition to country risk provision that is applicable to all overseas exposures) against standard assets representing all exposures to the step-down subsidiaries, to cover the additional risk arising from complexity in the structure, location of different intermediary entities in different jurisdictions exposing the Indian company, and hence the bank, to greater political and regulatory risk. The modified instructions under the 2015 Circular will apply to credit facilities sanctioned after December 31, 2015 and to existing facilities upon renewal thereafter.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
