Jurisdiction - India
India – Foreign Exchange Snapshots.

29 April, 2014


  • RBI has, by way of a circular dated January 9, 2014, amended pricing guidelines for equity shares or preference shares/ debentures issued to persons resident outside India under Regulation 5 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (‘FEMA 20’). RBI has now permitted optionality clauses in equity shares and compulsorily and mandatorily convertible preference shares/ debentures to be issued to a non-resident under the FDI scheme, subject to certain conditions. 


  • RBI has issued a circular dated March 25, 2014 (‘FPI Circular’) pursuant to which a new scheme called ‘Foreign Portfolio Investment’ scheme (‘Scheme’) is stipulated. RBI has, by its notification dated March 13, 2014 (‘FPI Notification’), amended FEMA 20. The salient features of the Scheme as notified by RBI are as follows:


i. Portfolio investors registered in accordance with the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’), namely, Foreign Institutional Investors (‘FIIs’) and Qualified Foreign Investors (‘QFIs’), shall now be collectively called Registered Foreign Portfolio Investor(s) (‘RFPI(s)’).


ii. RFPIs may purchase and sell shares and convertible debentures of Indian companies through registered stock brokers on recognized stock exchanges in India as well as purchase shares and convertible debentures through public offer/private placement, subject to the conditions provided under FEMA 20.


iii. RFPIs may acquire and sell shares or convertible debentures subject to prescribed restrictions.


iv. The FPI Notification states that any registered FII shall be deemed to be an RFPI till the expiry of the relevant block of three years for which registration fees have been paid. A registered QFI may continue to deal in securities as such up to January 6, 2014, or until it obtains a certificate of registration as a RFPI, whichever is earlier. All investments made by such FII, sub-account or QFI in accordance with the FEMA 20, prior to registration as RFPI, shall continue to be valid.


v. RFPIs shall be permitted to open a foreign currency account and a special non-resident rupee account with an authorized dealer bank for routing the receipt and payment for transactions relating to investment in securities under the Scheme. RFPIs can remit funds from the Indian cash account, subject to payment of applicable taxes. 

vi. The individual and aggregate investment limits for each RFPI are now fixed at 10% and 24% respectively of the total paid-up equity capital or the paid-up value of each series of convertible debentures issued by an Indian company – a significant jump in relation to QFIs. Further, these limits for FPI investments must also be within the specified sectoral caps for foreign direct investment. The aggregate limit of 24% can be increased up to the relevant sectoral cap, following a resolution of the board of directors and special resolution of the shareholders of the Indian investee company.


vii. Other miscellaneous features of the Scheme read as follows–


    • RFPIs shall be eligible to invest in government securities and corporate debt, subject to limits specified from time to time;
    • RFPIs would be permitted to trade in all exchange traded derivative contracts on the stock exchanges in India, subject to the position limits specified from time to time; and
    • RFPIs may offer cash or foreign sovereign securities with AAA rating or corporate bonds or domestic government securities, as collateral to the recognized stock exchanges for their transactions in the cash as well as derivative segment of the market.


  • RBI’s First Bi-Monthly Monetary Policy Statement of 2014-2015 states that all the existing guidelines in relation to the valuation of any acquisition/ sale of shares will be withdrawn, and accordingly, any new transactions will be based on acceptable market practices. Operational guidelines will be notified separately. The change in policy is expected to have a significant impact on foreign direct investment transactions and structuring issues.


  • RBI has issued a circular dated December 24, 2013 amending Regulation 6(2) of the Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000, which imposed restrictions on the utilisation of Rupees borrowed by a person resident in India from a person resident outside India. RBI has now permitted Indian resident entities and companies (as authorised by GoI) to issue tax-free, secured, redeemable, non-convertible bonds in Rupees to persons resident outside India and to: (i) use such borrowed funds for on-lending to the infrastructure sector; and (ii) maintain such funds in fixed deposits with banks in India, pending utilisation for permissible end-uses.


  • RBI has, by a circular dated January 3, 2014, prescribed that the renewal or rollover of an existing/original guarantee (which forms part of total financial commitment of an Indian party under Regulation 6 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Fifth Amendment) Regulations, 2004) will not be treated as a fresh financial commitment, provided that:


i. the existing/original guarantee was issued in terms of the prevailing Foreign Exchange Management Act, 1999 (‘FEMA’) and the guidelines framed thereunder;
ii. there is no change in the end-use of the guarantee (i.e. facilities are to be availed by the joint venture, wholly owned subsidiary, or step down subsidiary of the guarantor);
iii. there is no change in any of the terms and conditions of the guarantee, including the amount of the guarantee, but excluding the validity period;
iv. reporting of the rollover guarantee is done as a fresh financial commitment; and
v. any enforcement or regulatory body investigating the Indian party is kept informed about the rollover of the guarantee.


Non-fulfillment of any of the above conditions will require the Indian party to obtain prior RBI approval for the rollover of the existing guarantee through the designated authorised dealer (‘AD’) bank.


  • RBI has, by a circular dated January 6, 2014, provided a clarification regarding the issue of non-convertible/redeemable bonus preference shares and debentures as per FEMA 20. RBI has granted general permission to Indian companies to issue non-convertible/redeemable preference shares (‘NCPS’) or debentures to non-resident shareholders (including depositories acting as trustees for holders of American or Global Depository Receipts) by way of distribution as bonus from its general reserves under a scheme of arrangement approved by an Indian court under the applicable provisions of the Companies Act and subject to a NoC from the income tax authorities. However, the issue of preference shares (excluding NCPS) and convertible debentures (excluding optionally/ partially convertible debentures) under the Foreign Direct Investment (‘FDI’) scheme will continue to be governed by extant foreign exchange regulations. Further, as per the amendment, an Indian company should not be engaged in any activity or sector prohibited under FEMA 20.


  • RBI has, by way of a circular dated January 9, 2014, issued a clarification regarding Section 6(4) of FEMA, which sets out the manner in which a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if these were acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. RBI has clarified that Section 6(4) covers the following transactions:


i. foreign currency accounts opened and maintained by such person when resident outside India;
ii. income earned through employment, business or vocation outside India taken up or commenced while such person was resident outside India, or from investments made or gifts or inheritances received while resident outside India;
iii. foreign exchange including any income arising from conversion, replacement or accrual to the same, held outside India by a person resident in India acquired by way of inheritance from a person resident outside India; and
iv. a resident may freely utilise all his eligible assets abroad as well as income on such assets or sale proceeds received after their return to India, for payments or fresh investments abroad without approval of RBI, provided that the cost of such investments and any subsequent payments received are met exclusively out of funds forming part of eligible assets held by them, and that the transaction is not in contravention of FEMA.




For further information, please contact:


Zia Mody, AZB & Partners
[email protected]


Abhijit Joshi, AZB & Partners 
[email protected]

Shuva Mandal, AZB & Partners 

[email protected]


Samir Gandhi, AZB & Partners
[email protected]

Percy Billimoria, AZB & Partners 

[email protected]


Aditya Bhat, AZB & Partners 
[email protected]


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