Markets outside the USA already account for approximately 60% of the world’s capitalisation and opportunities for global investors continue to be on the upsurge.

World Economic Forum have released their Global Competitiveness Report 1996. The Market Growth index places India at the ninth position in the list of 49 countries investigated in the report. This would imply that in the medium-term (5-10 years), the Indian economy will have the ninth largest share of global economic growth. In absolute terms, India will account for 1.96% of the world's economic growth.

In view of the Indian Governments efforts to attract foreign investment lets take a look at the present framework (policies and procedures) formulated for foreign investment in India.

Foreign companies may start business operations in India through technical collaborations, direct investment or both. There are a number of entry options available to foreign investors in the manufacturing, trading or services sectors.

They can start operations:

• as a company incorporated in India or as a branch operation
• by setting up a new company
• as a joint venture with an Indian partner or entirely on their own
• through a project office or a liaison office.

Financial capital can take three principal forms :

• Commercial Borrowings from the overseas market
• Portfolio Investment and
• Foreign Direct Investment (FDI).

Of these FDI is best suited to meet India’s growth needs for the following reasons: -

• Steady inflow, lower outflow : commercial borrowings commit future resources towards interest payments while portfolio investments run a risk of being withdrawn from the market. FDI avoids both theses shortcomings since repatriation begins only when a MNC starts posting profits, which would not take place in the initial years of production. Even then, much of the future profits would be ploughed back into the country.
• Adds to productive assets : While portfolio investment creates financial assets which can be converted to productive assets only indirectly, FDI, by its very nature, increases real investment by building productive capacities in the economy.
• Transfer of technology : MNCs bring with them high technology processes as also regular flow of the latest technology, thus equipping the Indian partner with the latest scientific developments. India based MNCs are also known to participate in adaptive research. A 1993 survey of affiliates of US firms in India concluded that their R&D expenditure as a percentage to total sales was highest compared to US affiliates in other countries.
• Domestic environment improves : The presence of MNCs generates a competitive environment and spurs domestic companies to improve their efficiency.
• BOP point of view : FDI has advantage in the responsiveness of servicing costs to economic conditions. Whereas, suppliers credit and bank loans impose a fixed cost that has to be paid, dividends on FDI are only liable if the investment is profitable.

India has a number of advantages to offer to potential foreign investors. Among these are a democratic polity, an economy characterised by steady growth, a single digit inflation rate, a vast domestic market, a large and growing pool of trained manpower, a strong entrepreneurial class, fairly well developed social and physical infrastructure, a vibrant financial system including a rapidly expanding capital market and a diversified industrial base.

Liberalisation of the FDI policy regime has resulted in a substantial expansion of FDI approvals and flows. The total number of foreign collaboration approvals went up from 950 in 1991 to 1,854 by 1994, registering an increase of over 95%.

Foreign direct investment, both approvals and inflows, continues to show a strong upward trend as will be seen from the following table, which gives figures for the period 1991 to October 1995.

With Foreign Direct Investments approvals worth Rs.25,477 crores, the United States of America, heads the list of countries investing in India during the "post policy period - August 1991 to October 1996.

India is the second most promising country for Foreign Direct Investment (FDI) over the long term and seventh most promising over the medium term according to an assessment of the Export Import (Exim) Bank of Japan.

China tops the list for the medium term (three years) investment followed by Thailand, Indonesia, USA, Vietnam, Malaysia, India, Philippines, Singapore, UK and Taiwan.

The order changes for the long term (ten years), except for USA, which ranks fourth for both medium and long terms. The long term ranking of the Exim Bank is China, India, Vietnam, USA, Indonesia, Thailand, Malaysia, Burma (Myanmar), Philippines and Mexico.

Despite the series of steps taken by the Government to attract FDI, foreign investors remain concerned about the pace of implementation of the reform measures and wary about the irreversibility of the liberalisation process. Stability is the most important element in the corporate appraisal of a country’s FDI policy, as FDI involves a long term commitment. Unless the corporate body is sure that the present policy will continue for sometime, it is not in a position to take a decision. Unfortunately the record with respect to stability is rather poor. Policy relating to foreign investment in the power sector is a classic case where policies and procedures have been in a state of flux for a long time. So is the case of the telecommunications sector. This has resulted in a wait and watch attitude on the part of some of the foreign investors, either because they are not absolutely sure of the future or because of the expectation of securing a better policy package in the succeeding period.

It has been observed that while the FIPB system provides a great degree of flexibility, there is scope for introducing further transparency in the system. Lack of transparency leads to unnecessary delays in the approval and the execution of the projects.

Currently, there are several agencies which are involved in the FDI approval system. Though the domain of each agency is more or less defined, the very fact that there is more than one agency for granting approvals creates confusion in the minds of the prospective investors. Multiplicity of routes of approval which could be simplified and reduced to the Automatic Approval (AA) and FIPB routes.

There is a need to consider change-over from the positive list approach to a negative list approach for expanding the areas of FDI. It has been seen in many countries that laying down clearly the areas where foreign investment is not permitted adds to the transparency in the Policy.

At a systemic level, bureaucracy is still perceived to be a major area of concern. The unchanged mind-set and an antiquated legal-cum-procedural system generate enormous delays. Progress is slow for approvals for land acquisition and environmental issues may delay start-ups substantially.

There is virtually no co-operation between the states and the central Government in terms of FDI approvals and subsequent follow-ups. Once the approval for FDI is given by the Central government to the foreign investor, he has to approach the state level agencies for project implementations. These relate to approvals for acquisition of land, clearances for water, power, sales tax number, etc. Some laws, e.g., the Urban land Ceilings Act, Industrial Disputes Act, SICA, Packaging Controls Regulations order and the Lube and Grease Control order have been identified as major hurdles for larger FDI projects. Lack of co-operation between the Centre and the states has also affected the marketing of reforms in the domestic market.

India’s corporate tax rates are also perceived to be higher than the corresponding rates in some other Asian countries. There is some empirical evidence to show a negative correlation between tax flows and FDI flows.

Issues regarding convertibility are often refers to in the context of FDI flows. It is argued that the convertibility of the rupee will provide necessary psychological support to the foreign investor regarding the safety of his earnings in the form of dividends, royalties and management fees, but also his capital. Besides, it is believed that convertibility also helps the foreign investor to plan his global investments without the apprehensions of delays and sometimes refusal of or reduction in the volume of repatriation.

Since India for all practical purposes followed a fairly restrictive FDI policy for more than 2 decades, it can be presumed that both the quantity and quality of information on doing business in India were at a sub-optimal level at the beginning of the reforms process. As a logical corollary, it follows that unless there is concerted national effort to publicise the Policy changes and the long term potential of India as a market, the anticipated fallout’s of the New Policy would be far below expectations. Many investors feel that India is still fairly unknown as a FDI location. To bridge this gap, it is necessary to take steps for promoting India as a attractive investment destination.

India now permits FDI in virtually every sector of the economy, other than industries reserved for the public sector. While majority foreign investment (upto 51% ) is freely allowed in most industries, foreign equity upto 100% is encouraged in EOUs, the power sector, electronics and software technology parks. 100% foreign equity may also be permitted in other industries, depending on the merits of the proposal. In addition, in certain specified industries reserved for the small scale sector, foreign equity upto 24% is now permitted.

Foreign investors may invest in all areas except industries such as defence, atomic energy and railway transport. While 6 industries listed in Annex I of the Statement on Industrial Policy have been reserved for the public sector, private and foreign participation is permitted in some areas within this list such as mining; oil exploration; refining and marketing; and parts of the railway transport sector.

• Arms and ammunition and allied items of defence equipment, defence aircraft and warships;
• Atomic energy;
• Coal and lignite;
• Mineral oils;
• Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order,1953;
• Railway transport.

It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the full equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

No industrial license is required in India except for:

• Industries reserved for the public sector (Annex I above)
• Some specified industries of strategic, social or environmental concern
• Industries reserved for the small scale sector.

Applications for industrial licenses may be submitted to the Secretariat of Industrial Approvals (SIA) in the Ministry of Industry. Where an industrial license is not required, companies are required to file an Industrial Entrepreneur's Memorandum with SIA. This is meant mainly for monitoring industrial activity in the economy and trends therein.

Approvals for foreign direct investment in India follow two routes. Certain proposals are automatically given approval by the Reserve Bank of India. Other proposals which do not meet the parameters of automatic approval are cleared by the government on a case-by-case basis.

Automatic approvals for foreign investment in new ventures are possible for projects in 35 specified industry groups provided the foreign equity proposed is upto 51% of the total equity. Now this group has been expanded to 51 specified industry groups. Besides, the Government has also specified 9 industry groups for which automatic approval is available upto 74% foreign equity.

The automatic approval process is a fast track mechanism for clearing proposals which satisfy specified criteria. Automatic approvals are available for the following types of proposals :

1. Upto 51% foreign equity in :

• high priority industries, provided the foreign equity covers the foreign exchange requirement for the import of capital goods and the capital goods are not second hand. This group of industries is known as Appendix I industries and are areas in which FERA companies have already been allowed to invest on a discretionary basis.
• trading companies primarily engaged in exports.

2. Upto 100% foreign equity in :

• units set up in EPZs or
• units that are 100% EOUs subject to specified norms (for further information refer to Chapter 4)

• want to increase their equity holdings from existing levels to 51% provided they are engaged in a high priority industry, or;
• want to expand into a high priority

The Government of India has expanded the Annex III of the Statement on Industrial Policy, to cover 16 more industries, which allows for automatic nod to foreign equity upto 51%. In respect of mining in select minerals, the automatic approval would be upto 50% only.

The following is the list of industries to be added to the existing 35 industries for automatic approval for foreign equity upto 51%:

1. Mining of iron ore, mining of metal ores other than iron ore (mining of uranium group ores is not covered), mining of manganese ore, chromite, bauxite and copper ore, mining of non- metallic minerals not classified elsewhere.
1. Manufacture of food products, manufacture of starch and its derivatives.
1. Manufacture of cotton textiles, cotton spinning, weaving and processing in integrated mills, manufacture of wool, silk and man-made fibre textiles, wool-spinning, weaving and processing in integrated mills, spinning, weaving and processing of silk (textiles) in integrated mills, spinning, weaving and processing of man-made textile fibres in integrated mills.
1. Manufacture of textile products, manufacture of water-proof textile fabrics.
1. Manufacture of basic chemicals and chemical products (except products of petroleum and coal), manufacture of paints, varnishes' related products: artists' colours and ink.
1. Manufacture of rubber, plastic, petroleum and coal products, manufacture of coke oven products.
1. Manufacture of metal products and parts except machinery and equipment, manufacture of fabricated metal products, forging, pressing, stamping and roll-forming of metal, power metallurgy.
1. Manufacture of machinery and equipment other than transport equipment.
1. Manufacture of refrigerators, air conditioners and fire fighting equipment and parts and accessories.
1. Manufacture of special purpose machinery/equipment, their containers and accessories.
1. Manufacture of accumulators, primary cells and primary batteries.
1. Land transport (support services): Supporting services to land transport like operation of highway bridges, toll roads, vehicular tunnels.
1. Water transport (support services): Support services to water transport like operation and maintenance of piers, loading and discharging of vessels.
1. Services incidental to transport not elsewhere classified: Cargo handling incidental to land, water and air transport, renting and leasing of motor vehicles without operator for passenger and freight transport, renting and leasing of refrigerated/cold transport; renting and leasing not elsewhere classified.
1. Renting of transport equipment without operator, renting of office accounting and computing machinery and equipment without operator, renting of other industrial machinery and equipment, renting and leasing of refrigerated transport.
1. Business services not elsewhere classified: technical testing and analysis services, market research, research and development services (excluding basic research and setting up of R & D/ academic institutions which would award degrees/diplomas/certificates), health and medical services.

The Government has also added another list of 9 industries for which automatic approval upto 74% foreign equity has been allowed. The following is the list of industries for automatic approval of foreign equity upto 74%

Mining Services: Oil and gasfield services except exploration and production services; services incidental to mining, viz., drilling, shafting, reclamation of mines, surveys/mapping, excluding services related to gold, silver and precious and semi-precious stones.

Basic metals and alloy industries: Manufacture of iron-ore pellets, pig iron, sponge iron and steel in primary/semi-finished/finished forms. Manufacture of semi-finished iron and steel products in re-rolling mills, cold-rolling mills and wire-drawing mills.

Other manufacturing industries: Manufacture of items based on solar energy like solar cells, cookers, air and water heating systems and other related items, wind electric generators, small hydro-equipment. Manufacture of navigational, meteorological, geophysical and related instruments and apparatus, oceanographic or hydrological instruments, seismometers, range finders, automatic pilots, sextants, ultrasounding sounding instruments.

Electric generation and transmission : Non-conventional energy generation and distribution.

Construction: Construction and maintenance (C&M) of roads, rail beds, bridges, tunnels, pipelines, ropeways, ports, harbours and runways. C&M of waterways and water reservoirs, of hydroelectric projects, of power plants, of industrial plants, of tunnels and pipelines.

Water transport

Pipeline transport: excluding crude oil, petro products and natural gas pipelines.

Storage and warehousing services: warehousing of agro-products with refrigeration.

In all other cases i.e. those proposals for foreign investment :

1. Within or upto 51% in industries not listed as high priority in Annex III of the Statement on Industrial Policy.
1. Within or upto 51% in Annex III industries, but where the foreign equity does not cover the foreign exchange requirement for import of new capital goods.
1. Beyond 51% in all sectors (excluding the 9 sectors mentioned above).
1. In the service sectors including those in consultancy and financial sector.
1. Involving special features.

Applications should be submitted in the required form to the Entrepreneurial Assistance Unit of the Secretariat for Industrial Approvals in the Department of Industrial Development, Udyog Bhawan, New Delhi. (In form FC(SIA))

The RBI will issue the necessary permission for the foreign equity investment under the FERA, 1973. This permission will include exemption from the operation of sections 28, 29 and 31 of FERA, 1973. Simultaneously the RBI will confirm that the import of capital goods is covered by the foreign equity. Based on this confirmation the DGFT shall issue the relevant import license for capital goods imports.

Under the procedure outlined above the plant and machinery proposed to be imported must be new and not second hand. There will be no indigenous clearance of these capital goods. Applications for such approvals are required to be made to :

• The Joint Secretary, SIA
• The Secretary, FIPB

The proposal to SIA is required to be made in the prescribed form. No special application form is however, required for applying to the FIPB. Proposals can be sent directly to the FIPB or through any of India’s diplomatic missions abroad. All applications are to be cleared by the FIPB within 45 days.

• The approval of the Government foreign collaboration is valid for an initial period of two years. The Indian party and the collaborator should execute the agreement of foreign collaboration within this period strictly in conformity with the terms prescribed by the Government. The Indian party has to send an acceptance of the terms of the foreign collaboration on receipt of the Government approval letter to the concerned authorities.
• If any extension is needed the party will apply to the concerned Administrative Ministry, who will examine the request keeping in view the various steps taken by the applicant for implementation of the foreign collaboration approval and refer the file to the Member Secretary, FIPB, with their comments.
• FIPB is empowered to grant a further extension of one year.
• In case any further extension is needed, beyond the period of three years, it will be considered by the FIPB on the recommendations of the Administrative Ministry on the ground of public interest.

Fifteen copies of the foreign collaboration agreement duly executed are to be sent to the GOI for scrutiny. This agreement will be scrutinised by the concerned Ministry / Department. If it is found to be as per the terms specifically approved by the Government, a letter approving the terms of the agreement will be issued to the party. A copy of the agreement will be sent to the RBI through the Department of Economic Affairs to enable the RBI to authorise the remittances to the foreign collaborator.

This approval letter will be made a part of the foreign collaboration agreement to be executed between the Indian Company and the foreign collaborator and any provision of the same agreement which is not covered by the said letter or is at variance with the provisions of the letter shall be void and not be binding on the RBI or the GOI. If a question arises as to whether a provision in this agreement is or is not covered by the Government approval for parties by the SIAs decision on the same shall be considered as final.

A foreign investor has the option of acquiring a company already existing in India. Such acquisition would take place through the issue of fresh capital and / or transfer of shares of the existing Indian company to the foreign investor with the effect of transferring control. Shares of an Indian company could be acquired from another foreign investor, subject to RBI approval.

NRIs, OCBs and FIIs are allowed to acquire shares of listed companies by trading on the stock exchanges. Overall limits on such acquisition are however prescribed by the RBI. Other acquisitions can only be made through private arrangements.

The FERA, 1973 makes it necessary that the RBI permission be taken prior to acquisition of shares in an Indian company by a foreign investor. Similar permission is required in the case of transfer of shares from a foreign national to a person resident in India. Either the transferor or the transferee can apply for permission.

If a foreign investor has already acquired an Indian company, then such an Indian company is not restricted from acquiring shares in other Indian companies.

In addition to the permission required by the foreign investor, the existing investor company is required to satisfy the provisions of the Indian Companies Act, SEBI guidelines and listing agreement with the stock exchange.

• The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc..
• The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial license or on such capacity as specified in the approval letter.
• This restriction will not apply to items not requiring industrial license. In case of production in excess of this quantum, prior approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production.
• The royalty would not be payable beyond the period of agreement if the orders had not been executed during the period of agreement.
• Where the orders themselves took a long time to execute, then the royalty for an order booked during the period of agreement, but executed after the period of agreement, would be payable only after a Chartered Accountant certifies that the order in fact have been firmly booked and execution began during the period of agreement, and the technical assistance was available on a continuing basis even after the period of agreement.
• No minimum guaranteed royalty would be allowed.

The lumpsum shall be paid in three instalments as detailed below unless otherwise stipulated in the approval letter :

• First 1/3rd after the approval for collaboration proposal is obtained from RBI and collaboration agreement is filed with the Authorised dealer in Foreign Exchange.
• Second 1/3rd on delivery of know-how documentation.
• Third and final 1/3rd on commencement of commercial production, or four years after the proposal is approved by RBI and agreement is filed with the Authorised dealer in foreign exchange, whichever is earlier.
• The lump-sum can be paid in more than three instalments, subject to completion of the activities as specified above.

All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the date of remittance.

The applications for remittances may be made to the authorised dealer in Form A2 with the under mentioned documents :

• A "No Objection" certificate issued by the Income-Tax authorities in the standard form or a copy of the certificate issued by the designated bank regarding the payment of tax where the tax has been paid at a flat rate of 30% to the designated bank.
• A certificate from the Chartered Accountant in the prescribed form (Form TCK/TCR depending upon the purpose of payment).
• A declaration by the applicant to the effect that the proposed remittance is strictly in accordance with the terms and conditions of the collaboration approved by the RBI / Government.

The agreement shall be subject to Indian laws.

A copy of the foreign investment and technology transfer agreement signed by both the parties should be furnished to the following authorities :

• Administrative Ministry / Department.
• Department of Scientific and Industrial Research, New Delhi.
• Concerned Regional Office of Exchange Control Department, RBI.
• Authorised dealer designated to service the agreement.

All payments under the foreign investment and technology transfer agreement including Rupee payments (if any) to be made in connection with engagement / deputation of foreign technical personnel such as passage fare, living expenses, etc. of foreign technicians, would be liable for levy of cess under the Research and Development Cess Act A return in duplicate has to be submitted to the Regional Office of the RBI in the first fortnight of January each year(In form TCD).

For undertaking the export obligation if any, specified in the approval letter, the requisite guarantee should be furnished according to the detailed instructions issued by the DGFT (EO Cell), Ministry of Commerce and the Administrative Ministry.

Equity participation upto 24% of the total share holding is allowed in the SSIs. This is open to industrial undertakings including foreign collaborators. Applicants seeking foreign equity investment beyond 24% in the small scale sector have the option of :

• Giving up their SSI status and obtaining an industrial license/filing an Industrial Entrepreneurs Memorandum (IEM) as applicable, or;
• Restricting foreign equity participation to 24% and retain their SSI status.
• In respect of items reserved for the small scale sector, equity participation beyond 24% is considered for approval if there is a guarantee to export 75% of the production.

All proposals for investment in SSIs will have to go through the government route. i.e. the SIA / FIPB route.(For a comprehensive list of items reserved for exclusive manufacture in the small scale sector refer to Schedule III of the New Industrial Policy, 1991)

Time lag between approvals and actual inflow could be due to one, or a combination of the following :

• A naturally time consuming process : An approval from the central Government is just the first step towards the actual functioning of the projects. The next step requires agreements with local suppliers and state and municipal level clearances.
• Bureaucratic Delays : Being a federal government, a foreign investor needs approvals from both the Central Government and concerned state/local government. At the state level, however, considerable time elapses before all required clearances are made. The reform mentality and policies still need to percolate through to the state and municipal levels.
• Investor caution : The Enron muddle caused by the scrapping and subsequent re-negotiation of the Dhabol project, raised doubts in the minds of investors regarding the actual commitment different political parties have towards foreign investment.

The procedure for raising foreign equity in existing companies in India, including those who do not have any foreign equity at present are as follows :

1. The following categories of companies will receive automatic approval from the RBI for raising foreign equity, including those which have no foreign equity at present :

• Companies wishing to raise foreign equity as a part of their expansion programme: An existing company wishing to raise foreign equity upto 51% may do so as a part of an expansion programme. The expansion programme must be in high priority industries shown in Annexe III. The fresh / additional equity should be part of the financing of the expansion programme. The company itself need not be exclusively engaged in activities listed in Annexe III, only the proposed expansion must be predominantly in high priority industries shown in Annexe III.
• Companies wishing to raise foreign equity without any expansion programme : An existing company predominantly engaged in high priority industries listed in Annexe III can also raise foreign equity upto 51% without an expansion programme.

• The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the six months preceding the relevant date, or;
• The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

The guidelines shall also apply to the applications, pending with the RBI.

An Indian company (whose shares are listed on a stock exchange) intending to issue equity shares on a preferential basis to non-residents (Under automatic approval or under FIPB / SIA route) should submit an application to the RBI along with :

1. A certified true copy of the General body Resolution passed under section 81(1A) of the Companies Act, 1956 relating to preferential allotment, and;
1. The particulars of the working out of the price as per the above guidelines duly certified by its statutory auditors. In cases, where Section 81(1A) of the Companies Act 1956, is not applicable, the company should submit a certificate from its statutory auditors to that effect.
1. To facilitate completion of formalities for the issue of shares within the stipulated period of 3 months as per SEBI guidelines, the companies if they so desire, submit their applications for ‘in principle’ approval before passing of the General Resolution.

Applications for automatic approval will have to be filed with the RBI. In the case of an expansion programme, the application shall clearly state the description of the article to be manufactured in ITC (HS) classification. The proposal shall be a composite one including detailed information on capital goods to be imported for the project expansion programme. Under the provisions of the policy, the proposed foreign equity must cover the import of capital goods required for the expansion programme.

In the case of companies not undertaking an expansion programme, the application shall describe the existing products of the company in ITC (HS) classification.

There would be monitoring of outflow of foreign exchange on account of dividend payments which are to be balanced by export earnings over a period of time and that this monitoring will be done by the RBI. The dividend balancing will be done on the following basis only in respect of foreign investment approvals in the consumer goods sector :

1. The balancing of dividend would be over a period of seven years taken from the date of commencement of production for companies raising foreign equity for an expansion programme. For companies which are raising foreign equity without an expansion programme, this period will start from the date of allotment of the shares for raising foreign equity.
1. Remittance of dividend should be covered by earnings of the company from export of items covered by the foreign collaboration agreement.
1. Remittance of dividend can also be covered from earnings through export of items not mentioned in the agreement provided they are in the in the list of industries provided in Annexe III.
1. The amount of dividend payment may be covered by export earnings of such items prior to the payment of dividend or in the year of payment of dividend. The RBI will issue appropriate instructions to give effect to these provisions.

• EOUs maybe set up anywhere in the country
• EPZs have designated areas within which manufacturing and /or processing activity is carried out only for the purpose of exports. Such units may be engaged in the manufacture / production of agriculture, animal husbandry, aquaculture, floriculture, pisciculture, horticulture, sericulture, poultry and software. Units engaged in services may be considered on merit.
• There are seven designated EPZs :

1. Kandla in Gujarat
1. Mumbai in Maharashtra
1. Madras in Tamil Nadu
1. Falta in West Bengal
1. Cochin in Kerala
1. Noida, near Delhi in Uttar Pradesh
1. Vishakapatnam in Andhra Pradesh

• These EPZs have been designed to provide a low cost for production through easy availability of basic infrastructural facilities like developed land, standard design factory buildings, built-up sheds, roads, power, water supply, drainage and custom clearance facilities.

• EOUs / EPZ units can import industrial inputs free of customs duty.
• 100% foreign equity is permitted in EOUs / EPZ units.
• EOUs / EPZ units can raise foreign currency loans subject to certain conditions
• EOUs / EPZ units are entitled to tax holidays. They are exempt from payment of corporate tax for a block of 5 years in the first 8 years of operation.
• Export earnings continue to be exempt from tax even after the tax holiday is over.
• Industrial plots and standard design factories are available to EOUs / EPZ units at concessional rates.
• FOB value of exports of EOUs / EPZ units are allowed to be clubbed with that of parent/associate companies located in the domestic trade areas (DTA) for the purpose of getting Star Trading House, Trading House, Export House status.
• EOUs / EPZ units are exempt from the payment of central and state sales tax.
• Supplies from the DTA to EOUs / EPZ units are regarded as deemed exports and are hence exempt from payment of excise duty, which means that high quality inputs are available at lower costs.
• EOUs / EPZ may export goods through Star Trading Houses, Export Houses and Trading Houses.

The Government encourages foreign investment in EOUs/EPZ and freely permits upto 100% foreign equity in such units.

• The imported foreign goods

• are financed through foreign equity.
• forex required for import of plant and equipment net of taxes is within the ceiling of Rs. 100 million.

• The foreign technology agreement if any entered into by the unit is restricted to a lumpsum payment of Rs. 10 million or 8% royalty over a period of 5 years from the commencement of production.
• The project undertakes to achieve minimum export turnover and value addition as per the norms.
• The project is located

• within an EPZ, and availability of space and conformity with environment and other standards of the EPZ has been certified by the Development Commissioner, or;
• in an area other than an EPZ for which the locational conditions stipulated by the Department of Industrial Development have been complied with.

• The product to be manufactured does not require licensing and is not reserved for the public sector.
• The unit meets the requirements of the customs authority (i.e. is amenable to bonding).
• Where no sub-contracting is involved in the proposal.
• Where the exports are to general currency / hard currency areas.

• 10 copies of the application in the required form is to be submitted to the Development Commissioner of the EPZ concerned.
• In the case of an EOU, the application is required to be submitted to the SIA or Secretariat for Industrial Approval.

If the application is found to be satisfactory a Letter of Approval shall be issued by the SIA or the DC as the case maybe. Copies of this Letter of Approval shall be endorsed by the SIA and the DC to each other, to the Ministry of Commerce, the Central Board of Excise and Customs, RBI and Collector of Customs. Automatic approval may be given within 15 days by the Development Commissioner of the EPZ concerned.

If the application does not satisfy the conditions of automatic approval it will be remitted to the Board of Approvals.

All cases not falling into the above mentioned criteria shall come before the Board of Approvals, which shall consider and dispose them within a period of 45 days of the submission of the complete application :

• The proforma for this shall be the same as that for automatic approvals.
• 10 copies are to be submitted to the SIA or to the DCs of the concerned EPZs.
• The receipt of the application shall be acknowledged by the SIA or the DCs as the case may be, and a letter of reference may be given, which the applicant should quote in all future correspondence.

A revamp of the EOU and EPZ schemes is on the cards. A seven member committee has been set up under the chairmanship of the Joint Secretary of Commerce.

The committee will look into customs and excise issues relating to the EOUs and EPZs.

It will specifically consider :

• Changes in inter-unit transfer, debonding, DTA sales, disposal of scrap and subcontracting.
• Issues relating to the sale of imported material, importability of certain items, eligibility, reconditioning, repair and re-engineering, conversion.
• Other issues related to promotion of EOU and EPZ exports.

The commerce ministry also plans to invite the private sector to manage and market existing EPZs that are not performing well, besides setting up new ones. The Government will continue to provide infrastructure and other facilities such as customs bonding. The marketing and overall management will be transferred to private hands.

(Recently two proposals to privatise EPZs in - Surat and Mumbai - have been cleared, a third proposal has been received from greater Noida to set up its own EPZ.)

Based on the report of the Gill committee, which was set up some time ago, several changes were introduced to the scheme by the Centre.

However, certain contentious issues relating to DTA sales, disposal of waste/scrap and tax holiday during the entire period of the unit in the scheme did not find favour with the Ministry. The revamp has been planned since existing units do not find the scheme as attractive as the Export Promotion Capital Goods Scheme (EPCG) and the overall tariff reduction scheme.(The new Government is also considering extension of the EPCG to garment EOUs)

However, despite several complaints by the EOUs, exports under this scheme is expected to contribute 10% of the country’s total exports this year - up from 5 to 6% of last year. The committee has been asked to submit its report by August 31.

The GOI have also been adopting a number of schemes, special incentives and facilities inviting NRI savings and investment.

OCB means any overseas company, partnership firm or society owned directly or indirectly to the extent of at least 60% by NRIs and includes an overseas trust in which not less than 60% beneficial interest is held by NRIs directly or indirectly but irrevocably. (The concerned corporate body/trust in order to establish ownership interest must furnish to the RBI in form OAC or OAC 1, as applicable when applying for the first time and thereafter as and when required by the RBI.)

NRI / OCB generally fall under the following categories :

• Indian citizens who stay abroad for employment or for carrying on any business or vocation or for any other purpose in circumstance indicating an indefinite period of stay outside India.
• Indian citizens working abroad on assignments with foreign Governments, Government agencies or international / multinational agencies like UNO, IMF, etc.
• Overseas Corporate Bodies (OCBs) are bodies predominantly owned by individuals of Indian nationality or origin resident outside India and include overseas companies, partnership firms, societies and other corporate bodies which are owned, directly or indirectly, to the extent of at least 60% by individuals of Indian nationality or origin resident outside India as also overseas trusts in which at least 60% of the beneficial interest is irrevocably held by such persons. Such ownership interest should be actually held by them and not in the capacity as nominees. The various facilities granted to NRIs are also available with certain exceptions to OCBs so long as the ownership / beneficial interest held in them by NRIs continues to be atleast 60%.
• Officials of Central and State governments and public sector undertakings deputised abroad on assignments with foreign governments / agencies / organisations or posted to their own offices abroad.

NRI may invest his savings / earnings in India in the following manner (basically in all activities except plantation and agriculture) :

A non-resident may open any of the following bank accounts in India :

• Ordinary non-resident rupee account (NRO) may be operated in Indian Rupee for the remittance received from abroad through proper channels for keeping in saving or local disbursements or investment in Government plans, programmes and securities. Withdrawals require specific approval of the RBI. This cannot be repatriated freely.
• Non-resident external (NRE) account can be operated in rupee or in designated foreign currencies for local disbursement or investment in Government plans and securities, the income from which can be credited to this account. The amount kept in this account can be freely repatriated outside India.
• Foreign Currency Non-Resident (FCNR) account can be operated in Pound Sterling / US dollars / Deutsche Mark / Japanese Yen received through banking channels. The interest on deposit is also received in foreign currency. FCNR accounts are accepted as fixed deposit for the period from one year to five years. This account can be jointly operated with another NRI. Premature withdrawal attracts penalty.

NRI can deposit their saving / surplus with public limited companies in India (including Government undertakings with limited liabilities) with full repatriation benefits subject to the condition that :

1. The deposits are made for a period of three years.
1. The funds are made available either by remittance from abroad or by payment from NRE / FCNR account.
1. The funds are deposited in conformity with the prevailing rules and within the limits prescribed for acceptance of deposits by such companies. Deposits can also be made on a non-repatriable basis.

Non-resident Indians can freely invest their funds in securities, bonds, national saving certificates issued by the GOI and to units of the UTI.

NRIs are permitted to make direct investments in partnership / proprietorship concerns in India as also by way of subscription to shares / debentures of Indian companies. They are also permitted to place funds in company deposits. Similar facilities are also available to OCBs with certain exceptions. Wherever the investments are available with repatriation benefits, the funds for the purpose should be received by inward remittances from abroad or from the investors NRE / FCNR accounts. However, in respect of investments on a non-repatriation basis, funds from the NRO account should be used.

NRIs / OCBs who undertake not to seek at any time repatriation of the capital invested in India and the income earned thereon are permitted to invest, on non-repatriation basis as explained below :

The RBI has granted general permission to NRIs to invest by way of capital contribution in any proprietary or partnership concern in India engaged in any industrial, trading or commercial activity on non-repatriation basis subject to the following conditions :

• The amount invested should be remitted from abroad through normal banking channels or by transfer of funds held in investors bank accounts in India.
• The concern or the NRI does not engage in any agricultural or plantation activity or real estate business.
• The amount invested and income accruing thereon are not eligible for repatriation outside India and are payable only in non-convertible Indian rupees.
• The profits due to the NRI investor may be credited to his ordinary non-resident account maintained with a bank in India.

The RBI has granted permission to NRIs / OCBs to subscribe to shares / convertible debentures of an Indian company on a non-repatriation basis, and to an Indian company to issue shares or convertible debentures by way of new / rights / bonus issues provided that the company is not engaged in agriculture / plantation or real estate business. The payment for these shares should, however, be received by the NRIs / OCBs by inward remittance or by debit to their NRE / FCNR / NRO accounts maintained with an authorised dealer or with an authorised bank in India. (Form DIN required to be filed with the RBI within 90 days from the date of receipt of the investment.) The company may also credit the dividend / interest in respect of the shares / convertible debentures to the investor’s NRO account with a bank in India. Proposals for investment in non-convertible debentures of Indian companies by NRIs / OCBs on non-repatriation will be considered by RBI on case to case basis. (Form ISD required to be filed with RBI for the purpose.)

NRIs / OCBs require permission of RBI for purchasing shares of Indian companies by private arrangement. (Form FNC7 to be filed with RBI.)

NRIs / OCBs are permitted to invest in schemes of domestic mutual funds floated by public sector banks / financial institutions on non-repatriation basis. With a view to further encouraging investment by NRIs / OCBs in domestic mutual funds, it has been decided to permit them to invest in the schemes of all domestic public sector and private sector on a repatriation basis also, provided the payment for investment is received by way of inward remittance of foreign exchange or by debit to the investor’s NRE / FCNR account. The non-resident investors do not need a separate approval from the RBI for this purpose.

It has been decided to permit such investment to be made through the secondary market. NRIs / OCBs intending to invest in mutual fund schemes on a repatriation / non-repatriation basis through secondary market under the Portfolio Investment Scheme (PIS) should submit their application in the prescribed form, through the designated branch of an authorised dealer. NRIs / OCBs who have already obtained general permission under the PIS scheme need not, however, make a fresh application for this purpose.

NRIs / OCBs will be permitted to place funds in deposits with firms / companies on a non-repatriation basis. The application for this purpose may be made by the depositor or the deposit accepting firm / company to the office of the RBI. No separate application from the non-resident depositor is needed in such cases.

The exchange control department of the RBI has granted permission to companies for issue of commercial papers to NRIs. This is provided the amount invested will not allowed to be repatriated outside India and the CP will not be transferable. (Form ICP required to be filed with the RBI)

NRIs / OCBs are also allowed to invest in Indian firms / companies with repatriation benefit i.e. capital invested and dividend/interest income earned thereon are allowed to be repatriated outside India, under various schemes as explained below.

NRIs / OCBs are permitted to subscribe to new issues of shares (equity and preference) and convertible debentures of any new or existing company, with the right of repatriation of capital invested and income earned thereon, provided the aggregate issue to non-residents qualifying for the facility of repatriation does not exceed 40% of the face value of the new issue. Such investment can be made only in public or private limited companies raising capital for setting up new industrial / manufacturing projects or for expansion / diversification of their existing activities. Investment under this scheme can also be made in new or existing companies engaged in the following areas :

• Hospitals including diagnostic centres.
• Shipping.
• Oil exploration services.
• Development of computer software.
• Hotels with 3, 4 or 5 star rating.

NRIs / OCBs are permitted to invest in high priority industries listed in Annex III with full repatriation benefits unto 100% of the new issue of equity capital or convertible debenture. Permission for investment under this scheme is granted provide the it is made by inward remittance or by debit to NRE / FCNR account of the investor and should cover the cost of the import of capital goods, if any. In case of companies engaged in the manufacture of certain specified consumer goods, a condition regarding balancing of dividend outflow by export earnings over a period of seven years from the commencement of commercial production is stipulated by the RBI.

The scheme also covers investment by individual NRIs in partnership firms. NRIs / OCBs are also allowed to make investment upto 100% in Indian companies primarily engaged in export trading activities or in 100% EOUs or units located in EPZs. Repatriation of investment will be permissible only after the unit has gone into commercial production and subject to compliance with conditions stipulated at the time of investment. (Form ISD(R) required to be filed with the RBI)

Persons of Indian nationality resident outside India (NRIs) and OCBs are permitted to invest upto 100% in new issues of equity shares / convertible debentures of Indian companies in the following areas :

• Development of plots and construction of residential premises.
• Real estate covering construction of residential and commercial premises including business centres and offices.
• Development of township
• City and regional level infrastructure facilities including roads and bridges.
• Manufacturing of building material.
• Financing of housing development.
• Investment in Housing finance companies.

As in the case of NRIs, repatriation of the original investment in foreign exchange made by the OCBs will be permitted with the prior permission of RBI only after a lock-in period of three years from the date of issue of shares / convertible debenture. In addition, OCBs will also be permitted to repatriate net profit (upto 16%) arising from sale of such investment after the lock-in period of three years. Dividend / interest can however be remitted subject to payment of applicable taxes, without any lock-in period. (Form ISD(R) required to be filed with the RBI).

Key benefits of this scheme :

• Greatly enlarged scope for investment.
• Attractive repatriation benefit.
• Simplified rules and procedures.
• Exemption from wealth tax / gift tax.
• Speedy clearance of proposal.

NRIs / OCBs will be allowed to set up Indian companies with 100% equity participation for carrying on air-taxi operations in terms of the guidelines issued by the Director General of Civil Aviation for air taxi operations. Applications for the purpose should be made to the RBI. Repatriation of the investment and / or remittance of dividend will be permitted only after the expiry of five years of operation of the air taxi scheme and only out of accumulated net foreign exchange earnings. (Form ISD(R) required to be filed with the RBI)

Indian companies desiring to issue non-convertible debentures to NRIs / OCBs should submit their application to the Central Office of the RBI for necessary permission. Such applications are considered by the RBI on merits. (Form ISD required to be filed with the RBI)

NRIs / OCBs will be permitted by RBI to undertake revival of sick units by making bulk investments in them either by way of purchase of equity shares from existing shareholders or in the form of subscription to new equity issue of the sick units on the following basis :

• The bulk investment can be made on private placement basis upto 100% of the equity capital of the sick company with full benefits of repatriation of capital invested and income earned thereon.
• Repatriation of capital brought into India for the revival of the sick company will be permitted after a minimum period of five years. on merits of individual cases, after taking into account the future payment liabilities of the investee company.
• Issue / transfer of equity shares should be approved by the existing shareholders of the company through a special resolution.

For the purpose of investment under this scheme, a company is considered sick only if

1. a public financial institution or a consortium has already formulated a plan for its rehabilitation / revival, or;
1. public financial institution / bank providing credit facilities to the company has classified it as a sick unit on the basis of losses made consecutively for at least the previous three years and the market price of its shares has been below par for at least two years.

Applications for permission for issue / transfer of equity shares to NRIs should be made to the RBI in Form RSU, together with the particulars / documents specified in the application form.

Some of the revised guidelines approved by the Finance Ministry and RBI include :

• Grant of general permission to authorised dealers, mostly banks, to sanction rupee loans to NRIs against securities of shares held by them. These shares could be held on a repatriation or non-repatriation basis.
• Grant of general permission to authorised dealers to remit sale proceeds of shares, without obtaining prior permission of the RBI, to overseas banks which have extended loans to NRIs. Remittance of these sale proceeds by authorised dealers is to be net of applicable tax.
• Permission to NRIs to raise rupee loans on non-repatriation basis in India against collateral securities of their immovable property whether purchased by remittance from abroad or acquired otherwise.
• General permission to Indian companies to grant housing loans in India to their NRI staff through staff housing loan schemes, provided repayment is made from remittances in foreign exchange.
• Grant of general permission to Indian companies by RBI for payment of interest on delayed refunds of share subscription, subject to SEBI guidelines.

Safe custody of securities on behalf of NRIs and OCBs by institutional custodians, besides authorised dealers.

There have been several issues by Indian Corporates in the Euro-Market and they have all been successful. The investors in this market are primarily institutional investors who specialise in emerging market investments, some of whom are already registered as FIIs. A large number of these institutional investors are already familiar with India, and generally look favourably upon Indian investment opportunities.

The Euro-Market is a very broad market and would provide substantial exposure to the issuer. This would be an important consideration for an issuer approaching the market for the first time.

Indian companies making an Euro Issue generally resort to two kinds of instruments :

• Global Depository Receipts
• Foreign Currency Convertible Bonds

[I]. Global Depository Receipt

This expression is defined in paragraph 2(c) of "The Issue of FCCB and Ordinary Shares Scheme", 1993 as :

1. The shares are issued by the company to an intermediary called the depository, in whose name the shares are registered. It is the depository who subsequently issues the GDRs.
2. The physical possession of the shares are entrusted to another intermediary called the custodian, who is an agent of the depository.
3. Thus, while the GDR (denominated in dollars) represents the issuing company’s shares (denominated in Rupees), it has a distinct identity and, in fact, it does not figure in the books of the company.
4. The dividend outflow from the company is in Rupee terms, but the depository converts these rupees and pays the dividend in US dollars to the ultimate investor after deducting a withholding tax.
5. Thus, the main advantage of the GDR to the issuer company is that the company is not exposed to any exchange risk, although it is able to mobilise foreign exchange by way of issue proceeds.

Once the GDR is issued, it can be traded freely among international investors. An investor who wants to cancel the GDR can send it back to India for exchanging against share certificates. The earlier requirement of a lock-in period of two years has now been removed. The GDRs are freely tradable in the overseas market like any other dollar denominated security either on a foreign stock exchange or in the over the counter market or among a restricted group such as Qualified Institutional Buyers (QIBs).The record of ownership in India does not change with every transfer of GDR and as such the issuer is in no position to control the registration of transfers. The equity shares / bonds representing the GDRs are registered in the name of the overseas depository company and the representative share certificates/bond certificates are delivered to another intermediary bank called the domestic custodian bank which acts as the agent of the overseas depository bank in India.

This expression is defined in paragraph 3(b) of the scheme (The Issue of FCCB and Ordinary Shares Scheme) thus :

1. The FCCB is like the convertible debentures issued in India. It has a fixed interest or coupon rate and is convertible into certain number of shares at a pre-fixed price.
2. The conversion rights stipulate that the bond lender may convert the bond into ordinary shares, either on series of given dates or at any time between the dates specified in the future.
3. The FCCBs are attractive to the issuer company because they are available to the investor at a cost less than that of the alternative fixed interest debt instruments. For the investor, these bonds offer an opportunity to participate in the capital growth of a company. He receives a fixed income from the bonds as long as he holds them but stands to make a capital gain by converting the bond into equity, provided that by the conversion date the price of the shares has risen higher than the fixed conversion price. On the other hand, if the share price fails to rise, or falls, the risk is limited by the income return available from the fixed interest feature of the bond.
4. The FCCBs are normally issued with fixed exchange rate clauses specifying the rates at which the bonds may be converted to ordinary shares of the issuer company. The investors decision as to whether to opt for conversion or hold convertible bonds is, therefore influenced by relative exchange rate movements.
5. FCCBs would be an approved instrument for accessing External Commercial Borrowings. The terms and conditions normally applicable to ECBs would be applicable to FCCBs as well, i.e.

• External commercial loans can be raised only for meeting foreign exchange cost of capital goods and services.
• No borrowings will be permitted to meet rupee expenditure or for working capital purposes except under specified categories such as those with very long maturity or under somewhat concessional terms.
• Only in the case of infrastructure projects (power, telecommunications, railway sector) ECB can be utilised for project related rupee expenditure. License fee payments would be an approved use of ECB in the telecom sector. Also infrastructure and greenfield projects will be permitted to use ECB to an extent of 35% of project cost, as appraised by a financial institution / bank. In the case of power projects greater flexibility will be allowed, based on merits.
• Under no circumstances can ECB be used for investment and speculation in the stock market and real estate.

The salient features of the scheme (The Issue of FCCB and Ordinary Shares Scheme) are as under :

• The aggregate foreign investment made either directly or indirectly through the GDR mechanism shall not exceed 51% of the issued and subscribed capital of the issuing company.
• This is in addition to the maximum limit of 24% equity, which can be acquired by offshore funds, FIIs or NRIs through the secondary markets.
• It has been clarified that the ordinary shares and FCCBs issued against GDR shall be treated as foreign direct investment in the issuing company.
• A company which is implementing projects not predominantly contained in Annex III of the NIP 1991, or a company which undertakes a project contained in Annex III but whose direct foreign investment after the proposed Euro-issue is likely to exceed 51% of the post issue subscribed capital, will need to obtain prior FIPB approval before final approval to the Euro-issue is given by the Finance Ministry.
• Both the in-principle and final approvals are valid for 3 months from the date of their respective issues.
• Companies will not be permitted to issue warrants along with Euro-issues.

The eligibility criteria under the scheme is :

1. An issuing company desirous of raising foreign funds by issuing FCCBs or ordinary equity share issues through the GDR mechanism is required to obtain prior permission of Department of Economic Affairs, Ministry of Finance, Government of India.
1. Issuing companies having a consistent track record of good performance (financial or otherwise) for a minimum period of three years are allowed to issue GDRs/FCCBs.

• However, in view of the importance of the infrastructure projects, and the need to encourage equity financing of such projects, the three year track record will be relaxed in the case of companies seeking GDR/FCCB issues to finance investment in infrastructure industries such as power generation, telecommunications, ports, airports, roads petroleum exploration and refining.
• NBFCs registered with the RBI can float Euro-issues.
• These NBFCs will have to go through the FIPB route.
• The Finance Ministry expects about Rs. 900 crores to be raised through this route.

1. Companies will be allowed on merit to issue FCCBs as a part of a program of restructuring external debt which helps to lengthen maturity and soften terms.
1. The FCCB shall be denominated in any convertible foreign currency and the ordinary shares shall be denominated in Indian rupees.
1. On the completion of finalisation of issue structure in consultation with the Lead Manager to the issue, the issuing company shall obtain the final approval for proceeding ahead with the issue from the Department of Economic Affairs.
1. Companies would be required to submit quarterly statements of utilisation of funds certified by their auditors.
1. The policy and guidelines for Euro issues would be subject to review every 3 months.
1. A GDR may be issued in the negotiable form and may be listed on any international stock exchange for trading outside India.
1. The provisions of any law relating to issue of capital by an issuing company shall apply in relation to the issue of FCCB or the ordinary shares of an issuing company and the issuing company shall obtain the necessary permission or exemption from the appropriate authority under the relevant law relating to the issue of capital.

For the purpose of the requirement of the eligibility criteria stipulated in the Scheme as enumerated above, the issue structure of the company proposing to make an issue of GDRs or FCCB shall satisfy the following requirements :

1. A GDR maybe issued for one or more underlying shares or bonds held with the Domestic Custodian Bank.
1. The FCCB or GDR may be denominated in any freely convertible foreign currency.
1. The ordinary shares underlying the GDR and the shares issued upon conversion of the FCCB will be denominated only in Indian currency.
1. The following issues will be decided by the issuing companies with the Lead Manager to the issue, namely :

• public or private placement
• number of GDRs to be issued
• the issue price
• the rate of interest on FCCB
• the conversion price, coupon and the pricing of the conversion options of the FCCB

1. There would be no lock-in-period for the GDR issued under this scheme.

GDRs issued under this Scheme may be listed on any of the Overseas Stock Exchanges, or Over the Counter Exchanges or through Book Entry Transfer systems prevalent abroad and such receipts may be purchased, possessed and freely transferable by a person who is non-resident within the meaning of FERA, 1973, subject to the provisions of that Act.

The ordinary shares and FCCBs issued against the GDR shall be treated as direct foreign investment in the issuing company. The aggregate of the foreign investments made either directly or indirectly through the GDR mechanism shall not exceed 51% of the issued and subscribed capital of the issuing company. However, the investments made through Offshore Funds or by FIIs will not form part of the limit laid down in this paragraph.

The companies going in for Euro-issues will now have the option of :

• remitting funds into India in anticipation of the use of funds for approved end-uses, or
• retaining the proceeds of the Euro-issues abroad in foreign currency deposits with authorised dealers and / or public financial institutions in India holding authorisation from the RBI to deal in foreign exchange.

Accordingly it would be in order for authorised dealers / public financial institutions to accept foreign currency deposits from Indian companies out of Euro-issue proceeds subject to the following conditions :

1. The foreign currency deposits would carry interest at a rate not exceeding LIBOR for the respective period for which the deposit is accepted.
1. The authorised dealers / public financial institutions with whom the foreign currency deposits are kept should not swap the foreign currency for Indian Rupees but use the amount for on lending in foreign currency to eligible clients.
1. The authorised dealers may also invest surplus foreign currency out of such Euro-issue proceeds such as permitted in paragraph 5B.9 of the Exchange Control Manual subject to the conditions indicated above.
1. The authorised dealers / public financial institutions accepting the foreign currency deposits would be eligible to charge interest at the rate not exceeding 2.5% over six months LIBOR for lending out of such funds.
1. The authorised dealers will be required to maintain a cash reserve ratio of 7.5% on such deposits.
1. The deposit can be converted into Indian rupees only as and when expenditure for approved end uses are incurred by the issuing companies.(Including upto a maximum of the proceeds earmarked for general corporate restructuring uses)

The authorised dealers / public financial institutions accepting such deposits as also the issuing company as the case may be, should also comply with the conditions stipulated by the GOI in their approval letter for such issues.

The following provisions regarding transfer and redemption of GDRs and FCCBs and the transfer of underlying shares, are to be noted : -

1. A non-resident holder of GDRs may transfer those receipts, or may ask the Overseas Depository Bank to redeem those receipts. In the case of redemption, the Overseas Depository Body shall request the Domestic Custodian Bank to get the corresponding underlying shares released in favour of the non-resident investor, for being sold directly on behalf of the non-resident, or being transferred in the books of account of the issuing company in the name of the non-resident.
2. In case of redemption of the GDRs into underlying shares, a request for the same will be transmitted by the Overseas Depository Bank to the Domestic Custodian Bank in India, with a copy of the same being sent to the issuing company for information and record.
3. On redemption, the cost of acquisition of the shares underlying the GDRs shall be reckoned as the cost on the date on which the Overseas Depository Bank advises the Domestic Custodian Bank for redemption. The price of the ordinary shares of the issuing company prevailing in the Bombay Stock Exchange or the National Stock Exchange on the date of the advise of the redemption shall be taken as the cost of acquisition of the underlying shares.
4. For the purpose of conversion of FCCBs, the cost of acquisition in the hands of the non-resident investors would be the conversion price determined on the basis of the price of shares at the BSE or the NSE, on the date of conversion.

A company shall be required to specify the proposed end use of the issue proceeds at the time of making their application and will be required to submit quarterly statements regarding utilisation of funds, certified by their auditors. GDR issues will be permitted for the following end use to be incurred within one year from the date of issue:

1. Financing capital goods imports
1. Financing domestic purchase / installation of plant, equipment and buildings.
1. Prepayment or scheduled repayment of earlier external borrowing.
1. Making investments abroad where these have been approved by competent authorities.
1. Equity investment in Joint Ventures and Wholly Owned Subsidiaries in India.
1. Companies are now permitted use of issue proceeds for general corporate restructuring including working capital requirement, now revised from 15% to 25% of the GDR issue. The balance 75% can be parked in short term instruments such as Certificate of Deposits (CDs) or government treasury Bills.
1. Banks, FIs and NBFCs registered with the RBI will be eligible for GDR issues without reference to the end use criteria mentioned in points 1 to 6 above.
1. Investments in real estates and in the stock market will not be permitted.

Currently Corporates are allowed to access the foreign capital market for External Commercial Borrowing through instruments like FRN and fixed rate bonds. In order to enable Corporates to tap a wider spectrum of the market, they would also be permitted to structure their borrowings as a FCCB. The end use of funds through a FCCB should conform to the norms prescribed by the Government for ECB from time to time. Also the expectation of the Government is that FCCBs should have a finer spread than the corresponding debt instruments.

While the time frame for conversion of FCCB is flexible, the non-converted portion should have a minimum average tenor of five years.

In addition to these, not more than 25% of FCCB proceeds may be used for general corporate restructuring including working capital requirements.

• According to the scheme there will no capital gains tax on shares underlying the GDRs till these are redeemed.
• The cost of acquisition of the shares underlying the GDRs shall be reckoned as on the date on which the Overseas Depository bank (ODB) advises the domestic custodian bank for redemption.
• The price of the ordinary shares of the issuing company prevailing in the Bombay Stock Exchange (BSE) or the National Stock Exchange(NSE) on the date of advise of the redemption shall be taken as the cost of acquisition of the ordinary shares.
• Similarly, for the purpose of conversion of the FCCB, the cost of acquisition in the hands of the non-resident investors would be the conversion price, determined on the basis of the share prices on the BSE and the NSE, on the date of conversion of the FCCBs into shares.
• The holder of GDRs or FCCBs will not be required to pay ant capital gains tax on the movement in the prices of shares (issued against GDRs or FCCBs) between the time these instruments are acquired and the time they are converted or redeemed.
• Capital gains tax will be applicable on the movement in share prices after the GDRs are redeemed or the FCCBs converted into shares. These rates will continue to be 10% on long term (more than one year) and 55% on short term capital gains (less than one year ).

Following aspects may be noted :

1. 10% of interest will be deducted as tax on interest payments till conversion option is exercised.
1. 10% of dividend will be deducted as tax on dividends payable on the convertible portion of the bonds.
1. No capital gains tax liability on conversion of bonds into shares.
1. No capital gains tax in respect of transfer of bonds made outside India by a non-resident to another non-resident.

Following aspects may be noted :

1. 10% of dividend will be deducted as tax on dividends on the shares. The issuing company shall transfer the dividend payments net after deducting tax at source to the Overseas Depository Bank.
1. The Overseas Depository Bank shall distribute this net dividend to the non-resident investors proportionate to their holdings of GDRs converted to such shares.
1. All transactions of trading of GDRs outside India among non-resident investors will not attract any liability to income-tax in India in respect of capital gains arising thereon.

 

1. If any capital gains arise on the transfer of the said shares in India to the non-resident investor, capital gains tax will be applicable as under :

• If such shares have been held by such persons more than 12 months from the date of advice of their redemption by the Overseas Depository bank, the capital gains arising thereof will be treated as long-term capital gains. Income-tax at the rate of 10% of the capital gains will be applicable as per Section 115AC of the Income Tax Act, 1961.
• If such shares are held for a period less than 12 months from the aforesaid date, the resulting capital gains from the gain of such shares will be treated as short-term capital gains and will be subject to tax at the normal rates of income-tax applicable to non-residents under the Income tax Act.
• After redemption of GDRs, if the shares are continued to be held by the non-resident foreign investor, the rate of tax on dividend would continue to be 10% as per section 115AC(1) of the Income-tax Act. The long-term capital gains on the sale of these redeemed shares by the non-resident investors in the domestic market shall be charged to tax at the rate of 10% as per the above section 115AC(1).
• If the redeemed shares are sold on the Indian Stock Exchanges against payment in Rupees, section 115AC(1) will not be applicable in such cases. The income arising from such sale shall not be eligible for concessional tax treatment. Normal tax rates would apply.

During the period of fiduciary ownership of shares in the hands of the Overseas Depository Bank, the provisions of avoidance of double taxation agreement entered into by the GOI with the country of residence of the Overseas Depository Bank will be applicable in the matter of taxation of income from dividends from underlying shares and interest on FCCBs.

During the period if any, when the redeemed underlying shares are held by the non-resident investor on transfer from the fiduciary ownership of the Overseas Depository Bank, before they are sold to the resident purchasers, the avoidance of double taxation agreement entered into by the GOI with the country of residence of the non-resident investor will be applicable in the matter of taxation of income from dividends from the said underlying shares, or interest on the FCCB, or any capital gain arising from the transfer of underlying shares.

The holding of depository receipts in the hands of the non-resident investors and the holding of the underlying shares by the Overseas Depository Bank in a fiduciary capacity and the transfer of GDRs between non-resident investors and the Overseas Depository Bank shall be exempt from wealth tax under the Wealth Tax Act, 1957 or from gift tax under the Gift Tax Act, 1958.

There would henceforth be no restrictions on the number of Euro-issues to be floated by a company or group of companies in a financial year.

The procedural requirements for issue of GDRs and FCCBs briefly are as under :

• Authorisation by Board of Directors
• Authorisation by the Shareholders in a general meeting
• Government approvals :

• Ministry of Finance
• Department of Company Affairs

• Reserve Bank of India
• Consent of Stock Exchange

• The issuer company should pass a Board Resolution for taking a decision to float a GDR / FCCB in the Global Market.
• The Board should approve the notice calling a General Meeting of the shareholders for the purpose
• It is advisable to constitute a Committee of Directors and confer on it necessary powers for approving various matters / documents connected with the Euro issue once the Board of Directors of the issuer company has decided to float GDRs / FCCBs in the Global Market. The following matters / documents will be approved by the Committee, namely :

1. Offering Memorandum
1. Fixation of the issue price
1. Subscription agreement
1. Deposit agreement
1. Agreement with the company’s process agent
1. Allotment of shares in favour of the Depository
1. Opening of Bank Account outside India and operation of the said account
1. Approval of Green-shoe option
1. Making filing necessary application with the Securities and Exchange Commission USA and / or making applications to Luxembourg Stock Exchange or other exchanges

• To sign and execute any deed, document, writing, confirmation, undertaking, indemnity in favour of any party including - managers, legal advisers, accountants or others who may be related to the issue.

The Board at its duly convened meeting authorises the following:

1. Approves the quantum of the issue, nature of securities and tentative terms and conditions thereof.
1. Appoints the lead managers to the issue.
1. Authorises the managing director / senior executives of the company to liase with the lead managers and appoint the other intermediaries.
1. Authorises the managing director / senior executives to make an application to the GOI to obtain prior permission of the GOI for the proposed issue and to obtain the requisite final approval on finalisation of the issue structure in consultation with the lead manager.
1. Decides to call an EGM of the company to obtain the approval of the members of the company in respect of the following :

• Increase of authorised capital if necessary-amendment of MOA and AOA.
• Issue of the proposed securities in terms of the provisions of the Companies Act, Articles of Association of the company and other stipulations, if any, of the Financial Institutions / Banks.

The shareholders must approve the proposal by a special resolution passed at a general meeting as per section 81 of the Companies Act. Approvals as per section 94, 16, and 31 of the Companies Act, should also be taken from the shareholders if required.

Approvals of Ministry of Finance, Department of Economic Affairs :

1. Government approval is, inter-alia, sought for issue size, terms of issue as to the issue price, payment of interest, conversion, redemption, payment of fees and expenses of the issue. Appointment of Lead Manager, Depository, Indian Custodian and listing of securities will be made including trading provisions and settlement provision.
1. Approvals to the effect that rule 19(2)(b) of the rules under Securities Contracts Act, 1956 is not applicable.
1. Direction to the effect that a copy of the offering Memorandum is to be filed for record with :

• SEBI
• Regional Stock Exchanges
• Registrar of Companies

1. Approvals to the effect whether the issue proceeds should be kept outside India or remitted to India.
1. Direction to the effect that the company shall submit within 2 weeks of the closing of the issue, a statement giving the following particulars namely :

• Full particulars of issue price.
• Listing arrangements completed.
• Total amount realised.
• Other relevant details regarding launching and initial trading of GDRs / FCCBs.

1. Approval of Central Government is valid for a period of six months.

The company should make an application to the GOI and the application should set out in detail the following points :

1. Proposed project or expansion / diversification program with details of cost of project and means of financing.
1. The proposed security viz. GDRs / FCCBs.
1. In the case of Bonds, particulars of redemption period, rate of interest, time of conversion of bonds into Equity shares of the company, price at which such conversion will take place.
1. In the case of GDRs the price at which the equity shares will be issued.
1. Justification for the foreign issue.
1. Other details about the company such as Management and financial data.
1. The GOI if satisfied with the company’s proposal, issue an approval in principle granting permission to the company to mobilise foreign currency resources upto a specified amount.
1. On completion of issue structure in consultation with the Lead managers to the issue, the company should obtain the final approval from the Government for this purpose, the company should furnish the following information to the Government :

• Lead managers / Co.-managers
• Principal amount for bond issue
• Currency
• Issue price, premium if any
• Conversion premium
• Maturity
• Listing of bonds
• Optional redemption by the company
• Optional redemption by the investor
• Form and denomination
• Taxation
• Commissions
• Reimbursable expenses
• Governing Laws (For bonds and GDRs)
• Principal amount
• Greenshoe option
• Overseas Depository Institution for Euro-equity issue
• Indian custodian
• GDR listing
• Underlying shares listing
• Selling commission
• Underwriting commission and management fees
• Legal expense

On receipt of the above information from the company, the Government if satisfied, if issue a final approval for the issue.

Approval of the Department of Company Affairs is sought for :

1. Permission under section 81(3)(b) for issue of Euro-Convertible Bonds.
1. Approval to the effect that provisions relating to issue of prospectus are not applicable.
1. Clarification as to non-applicability of provisions of section 108 of the Companies Act for GDRs issued.

Approval from RBI is sought for :

1. Approval under Section 19(1)(d) of FERA to make an international offering to foreign investors through the GDR mechanism.
2. Approval / general permission for the following :

• To acquire GDRs by foreign investors under Section 29(1)(b) of

• To redeem the FCCB after a specified period.
• To pay interest on due dates.
• To convert the FCCB into either GDRs or ordinary shares of the company after a specified period.
• To export certificates to non-resident holders under section 19(1)(a) of FERA.
• To appoint lead managers to the issue.
• To appoint Depository and Custodian for the purpose of GDR.
• To specify the extent of the green shoe option.
• To pay issue related expense.
• To remit and pay for filing, listing, agency and other fees on ongoing basis in respect of any international Stock Exchange.
• To maintain a foreign register of Bond holders / GDR holders if required.
• To open an account abroad to receive subscription moneys in foreign currency and repatriate funds through banking channels to India .
• To pay any foreign tax in the nature of sales or value added tax in respect of services provided.
• To pay / remit dividends on shares.
• To issue securities by way of rights / bonus that may accrue.
• To appoint trustees, agents and registrars to the issue and payment of fees to them for the services rendered.

Approval of Stock Exchange is sought to the effect :

1. That the equity issued upon conversion of GDRs would be listed and admitted to dealings on the exchange.
1. That the usual pre-listing requirements relating to purely Indian / domestic issues is not applicable.

The Company generally holds preliminary discussion with the Global Merchant Bankers before taking a decision to float a GDR. A formal appointment of the Global Merchant Banker is only made after approval of the Government for the GDR issue.

The Merchant Bankers select the following intermediaries :

• Overseas underwriters to market the issue by organising road shows with the issuer.
• Lead Managers to the issue, Bankers, etc..
• Depositories to issue GDRs to the underwriters who arrange to place them with the ultimate investor.
• Custodians to hold the shares of Indian company physically on the behalf of the depository.

A team consisting of legal, technical and financial personnel from the Lead Managers shall visit the issuer company.

During the visit :

1. Financial Team goes through the detailed balance sheet of the company, and its subsidiary, its financial arrangement with the group, investment pattern and also analyse the future prospects of the company.
1. Technical Team goes through the projects, its technology, life of technology, etc..
1. Legal Team goes through the minutes of the company, various agreements entered into by the company with regard to marketing, purchase tie-up and also employment strategy, personnel policy and any other litigation which may have an impact on the profit of the company.
1. Help in preparing of the prospectus.
1. Interview auditors and senior executives of the company to ensure accuracy of description of the company in the prospectus.

Indian companies should get their balance sheets verified by internationally recognised Chartered Accountants for complying with the listing norms of overseas stock exchanges. This exercise starts well ahead of time before launching the Euro issue. It is necessary as there is a wide difference between the Indian Generally Accepted Accounting Principles (IGAPP) and UK Generally Accepted Accounting Principles (UKGAAP).

Disclosure and accounting requirements in a Euro issue prospectus can be classified as under:

• Audited financial statements for 3 - 5 years.
• Statement of GAAP differences.
• Reconciliation of net profit and net assets.

1. Number of shareholders of the company ?
1. Details of shareholders holding 5% or more of the issued capital?
1. Proportion of company shares that can be regarded as being disseminated internationally among the public and what is the breakdown of the shareholders by geographic area?
1. Would the company be using the quotation of the shares as away of achieving or increasing public dissemination of the shares?
1. How does the company intend to achieve this dissemination?
1. What measures will the company take to deal with GDRs offered for sale during a limited period after the admission to listing?
1. Generally, how will the company act to avoid random fluctuations in the price of your GDRs?
1. Why has the company elected to be listed on this particular Stock Exchange?
1. Has the company applied for a simultaneous listing of GDRs on other official exchange or does the company envisage doing so after the GDRs have been admitted to listing in this particular exchange?
1. What is the approximate value of the shares?
1. According to what criteria will the company assess the initial / listing price on the exchange?

1. Initial organisation meeting between the Issuer and Lead Manager. Appointment of Indian and English counsel, establishment of working group, provisional timetable and allocation of responsibilities.
1. Key structural aspects of the issue discussed and reviewed by all parties in order to develop a coherent structure which meets both regulatory and marketing requirements.
1. Initial drafts of various agreements prepared.
1. Process of due diligence begins with the Issuer, Lead Manager and relevant counsel. Work begins on the offering circular.
1. Meeting with company auditors to determine status of financial statements and Indian accounting practice.

1. The Issuer and the lead Manager consider and revise drafts of the Offering Circular, in particular Description of the issuer, terms and conditions of the issue and other documentation.
1. Resolve all major outstanding accounting issues, submit initial draft of comfort letter to the Issuer’s auditors and discuss it with them.
1. The Issuer and the lead Manager discuss selection of co.-lead managers and agree on composition of the management group.
1. Selection of trustees, paying, transfer and comfort agent, registrar and Stock Exchange listing Agent.
1. Prepare and submit necessary documentation for application for listing of securities on the selected European stock exchange.

1. The issuer obtains all relevant tax, exchange control, regulatory or other consents, clearances and approvals from the Ministry of Finance and RBI, shareholder and Board approval for the proposed issue.
1. Respond to the comments received from the selected European stock exchange.
1. Finalise offering circular and other particulars, including Trust Deed and Paying & Conversion Agency Agreement.
1. Finalise drafts of auditor’s report and comfort and consent letters with auditors.
1. Finalise draft of legal opinions with counsel.
1. Finalise and print preliminary offering circular.
1. Road show begins.

1. The issuer and the Lead Manager agree on indicative terms upon which to launch the issue.
1. Lead Manager invites syndicate members to join the management group and issues formal invitations.
1. Lead Manager despatches preliminary Offering Circular and draft documents to syndicate invitees.
1. Road show and marketing continues.
1. Firm offer telex and acceptance of firm offer by return telex.
1. Launch of issue in the market.

1. Distribution of prospectus.
1. pricing.
1. Start of secondary market trading.
1. Signing of underwriting agreement.
1. Closing / payment of net proceeds.

We had the first FIIs entering the Indian stock market in November’93. Today the total FII exposure stands at more than Rs.1,70,000 crores. The total number of registered FIIs are 367, but only 25 are active in the market.

During January 1996 to March 1996 about Rs.4000 crores have come from FII investment (upto March’96). This accounts for almost 50% of the investment in the year 1995-96.

There has been a tremendous focus on emerging markets in the last six months or so which may be due the following reasons :

1. Cheap stocks in emerging markets including India. Indian stocks look comparatively cheaper with a price to earning multiple of 15.
1. Average return in emerging markets is more attractive since in developed markets returns have almost saturated for the time being.
1. Excess liquidity in developed markets which is giving a boost to emerging markets.

• Excess liquidity in developed economies is due to cheap money policy of most Central banks. This implies cutting interest rates in recent months to support growth and development in Europe and the USA, also Japan is pumping in money to drag it’s economy out of recession.
• Low interest rates and expansion in money supply creates a liquidity in the system which is far in excess of the needs of the domestic stock markets and cannot be absorbed by them.

1. Fund managers do not want to experience another Black Monday (in October’87) when stock markets in the USA crashed. So to hedge their risks adequately they allocate a portion of their funds in the emerging markets.
1. All major economies are in a phase of increasing but still slow growth, so demand for money from the real sector is not very high, this money is available for inflows in financial assets.

There was a boom for emerging markets in 1993 and a huge inflow of funds into China, South Korea, Singapore, Taiwan and Malaysia. But this boom was short-lived because almost all developing economies adhered to increasing interest rates in stages when their economies were coming out of recession. This led to outflow of funds from emerging markets to developed markets soon after the interest rates stabilised.

This time things look a little different. A study by ING Barings Global Strategy Unit predicts that excess global liquidity will lead to another bout of foreign buying in emerging markets.

Thus the FII investment decision process in general depends on :

• State of parent economy and market.
• Emerging market indices.
• Taxes.
• Typical FII approach :

• go in for high liquidity A group shares to align with index
• B group shares to be considered once FII is more comfortable in the market

Recently Morgan Stanley Composite Index (for emerging markets) enhanced India’s weightage from 6.1 to 7.2. (The EMF Index is the bench-mark for most emerging market investments by FIIs)

Political uncertainty in Hong Kong and Taiwan will ensure more funds allocation to India if the present economic policies continue.

A study by Jardine Fleming India Broking indicates that rise and fall of M3 goes almost hand in hand with rise and fall of the SENSEX. A major factor affecting M3 is the inflow of dollars. Between the start of the year and April’96, the SENSEX has been pushed up from 3072 to 3782, a 25% rise which is attributed to FII inflows.

The Indian stock and money markets have thus become far more globalised than is commonly assumed, and almost every rise and fall in the country’s macro-economic indicators over the last two years have been caused by external factors. Inflows into the Indian market is a pittance compared to global standards but it still creates a domino effect on the market.

A difference of $800 million on a year to year basis and this small an amount should not cause tremors in the economy. However, statistics hide more than they reveal. Things will be more apparent if we change the period of reference to the following:

Net investment $2.42 billion and GDR/ECB was $3.4 billion. Total $5.82 billion.

Net investment $1.05 billion and GDR/ECB was $632 million. Total $1.68 billion.

Thus FII investment in Nov’94-Oct’95 is

• only 29% of investments in Nov’93-Oct’94.
• In absolute terms difference is $4.1 billion (Rs.13,940 crores).
• 1.5% of GDP.

This huge amount disappeared from the system causing convulsion in the stock and money market. FII investment now clearly determines the SENSEX level, interest rates, inflation rate, monetary growth, etc..

Since SENSEX now follows FII inflows, an investor needs to follow global money markets much more closely now. He has to track Fed rates, Dow Jones, global portfolio flows, stock market index behaviour in emerging markets like Malaysia, Thailand, Indonesia, Argentina and Brazil which are closely tied to foreign funds flows.

• The transborder funds flow is estimated to be $50 billion in 1996 as against $12 billion in 1995.
• If India gets 1.5 to 2% of this, a net inflow of $7.5 billion is expected in 1996 subject to the political scenario.
• The reasons for this are :
• Global portfolios in India are underweighted
• Reallocation of resources from Hong Kong and Taiwan.
• Excess liquidity in the developed market
• Hedging of bets
• Herd mentality

FIIs including institutions such as pension funds, mutual funds, investment trusts, asset management companies, nominee companies, institutional portfolio managers or their power of attorney holders would be welcome to make investments under these guidelines :

• As per the rules an FII has to register with SEBI paying a fee of $10,000.
• FIIs would be welcome to invest in all the securities traded on the primary and secondary market, including the equity and other securities of companies which are listed in the stock exchanges in India including OTC Exchange of India. These would include shares, debentures, warrants and schemes floated by domestic mutual funds. The Government may even like to add further categories of securities from time to time.
• FIIs would be required to obtain an initial registration with the SEBI, the nodal regulatory agency for the securities market, before any investment is made in them in the securities of companies listed on the stock exchanges in India.
• Nominee companies, affiliates and subsidiary companies of FIIs would be treated as a separate FII for registration and may seek separate registration with the SEBI.
• FIIs shall also file with the SEBI another application addressed to the RBI for seeking various permissions under the FERA, in a format that would be specified by the RBI for this purpose. The RBIs general permission would be obtained by SEBI before granting initial registration and the RBIs FERA permission would also be obtained by the SEBI under a single window approach.
• For granting registration to the FII, SEBI shall take into account the track record of the FII, its professional competence, financial soundness, experience and other such criteria that may be considered relevant by the SEBI.
• An FII seeking initial registration with SEBI shall be required to hold a registration from the securities commission, or the regulatory organisation for the stock market in the country of domicile of the FII.
• SEBI’s initial registration would be valid for 5 years. The RBIs general permission under FERA to the FII would also hold good for 5 years. Both will be renewable for similar 5 year periods later on.
• The RBIs general permission under FERA would enable the registered FII to buy, sell and realise capital gains on investments made through initial corpus remitted to India, subscribe/renounce rights offerings of shares, investment on all recognised stock exchanges through a designated bank branch, and to appoint a domestic custodian for custody of the investments held.
• The general permission from the RBI shall enable the FII to :

1. Open foreign currency denominated accounts in a designated bank
1. Open a special non-resident rupee account to which could be credited all receipts from the capital inflows, sale proceeds of shares, dividend and interest
1. Transfer sums from the foreign currency accounts to the rupee account and vice versa at the market rates of exchange
1. Make investments in securities in India out of the balance in the rupee account
1. Transfer repatriable (after tax) proceeds from the rupee account to the foreign currency accounts
1. Repatriate the capital, capital gains, dividends, income received by way of interest, etc.. And any compensation received towards sale/renunciation of rights offerings of shares subject to the designated branch of a bank/the custodian being authorised to deduct withholding tax on capital gains and arranging to pay such tax and remitting the net proceeds at market rates of exchange
1. Register FIIs holdings without any further clearance under FERA

There would be no restriction on the volume of investment for the purpose of entry of FIIs in the primary / secondary market. Also there would be no lock-in periods for the purposes of such investment made by FIIs. It is expected that the differential rates of taxation of the long term and short term capital gains would automatically induce the FIIs to retain their investments as long term investments.

• Portfolio investments in the primary or secondary markets would be subject to a ceiling of 24% of issued share capital for the total holdings of all FIIs, in any one company. The ceiling would apply to all holdings taking into account the conversions out of the fully and partly convertible debenture issued by the company.
• The holding of a single FII in any company would also be subject to a ceiling of 5% of total issued capital. For this purpose the holdings of a FII group will be counted as holdings of a single FII.
• The maximum holdings of 24% for all non-resident portfolio investments, including those of the registered FIIs, will also include corporate and non-corporate investments, but will not include the following :

1. Foreign investments under financial collaborations (FDI), which are permitted upto 51% in all priority areas.
1. Investments by FIIs through the following alternative routes :

• Off-shore single / regional funds.
• GDRs.
• Euroconvertibles.

• Divestment will be allowed only through the stock exchanges in India, including the OTC exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges, provided the sale price is not significantly different from the stock market quotations where available.
• All secondary market operations can be only through the recognised intermediaries on the Indian stock exchange, including OTCEI. A registered FII would be expected not to engage in any short selling in securities and to take delivery of purchases and give delivery of sold securities.
• A registered FII can appoint as custodian an agency approved by SEBI to act as a custodian of securities and for confirmation of transactions in securities, settlement of purchase and sale, and for information reporting. Such custodian shall establish separate accounts for detailing on a daily basis the investment capital utilisation and securities held by each FII for which its acting as a custodian. The custodian will report to the RBI and SEBI semi-annually as part of its disclosure and reporting guidelines.
• The RBI shall make available to the designated bank branches a list of companies where no investment will be allowed on the basis of the upper prescribed ceiling of 24% having been reached under the portfolio investment scheme.
• The RBI may at any time request by an order a registered FII to submit information regarding the record of utilisation of the inward remittances of investment capital and the statement of securities transactions. The RBI and / or SEBI may also at any time conduct a direct inspection of the records and accounting books of a registered FII.
• FIIs investing under this scheme (PIS) will benefit from a concessional tax regime of a flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long-term capital gains.

Requests have been received from the industry to allow listed companies to make preferential allotment in favour of registered FIIs for meeting the immediate resource requirements especially for medium and small scale companies.

It has therefore been decided (in consultation with the RBI) that henceforth listed companies may make preferential allotment to FIIs registered with SEBI subject to the following conditions :

1. In respect of all applications from companies for preferential allotment to FIIs approval will be granted subject to the condition that the aggregate NRI / FII / OCB investment does not exceed 24% of the equity of the company.
1. In respect of all applications received by RBI after 30th April, 1994, FII investment by way of preferential allotment will be permitted upto 15% of the equity of the company subject to the condition that the aggregate NRI / FII / OCB investment does not exceed 24% of the equity of the company.
1. The holding of a single FII for a sub-account wherever applicable in a company will not exceed the ceiling of 5% of the equity of a company as per the existing guidelines of FIIs.
1. The relevant date for the purpose of 26 weeks would be the date of the resolution passed by the General Body of shareholders under Section 81(1A) of the Companies Act.
1. Prior approval under FERA, 1973 of the RBI will be necessary in all such cases. For this purpose an application is to be made to the Controller, Exchange Control Department, Foreign Investment Division of the RBI.

In exercise of the powers conferred by section 30 of the SEBI Act, 1992 the following regulations are applicable.

In these regulations, unless the context otherwise requires :

• Act means the SEBI ACT, 1992.
• Certificate means certificate of registration granted by the Board under these regulations.
• Designated bank means any bank in India, which has been authorised by the RBI to act as a banker to FII.
• Domestic Custodian includes any person carrying on the activity of providing custodial services in respect of securities.
• FII means an institution established or incorporated outside India which proposes to make investment in India in securities.
• Form means form specified in the First Schedule to these regulations.
• GOI Guidelines means the Guidelines dated September 14, 1992, issued by the GOI for FII, as amended from time to time.
• Institution includes every artificial juridical person.
• Schedule means a schedule to these regulations.
• Sub-account includes those institutions, incorporated outside India and those funds or portfolios, established outside India, whether incorporated or not, on whose behalf investments are proposed to be made in India by a FII.

Application for certificate :

• No person shall buy, sell, or otherwise deal in securities as an FII unless he holds a certificate granted by the Board under these regulations
• Application for grant of certificate shall be made to the Board in Form A

• The Board may require the applicant to furnish such further information or clarification as the Board considers necessary regarding matters relevant to the activities of the applicant for grant of certificate
• The applicant or his authorised representative shall, if so required by he Board, appear before the Board for personal representation in connection with the grant of a certificate

Any application which is not complete in all respects and which does not conform to the instructions specified in the form or is false or misleading in any material particular, shall be rejected by the Board.

This is provided that before rejecting any such application, the applicant shall be given a reasonable opportunity to remove, within reasonable time specified by the Board, such objections as may be indicated by the Board.

For the purpose of grant of certificate, the Board shall take into account the following :

1. The applicants track record, professional competence, financial soundness, experience, general reputation of fairness and integrity
1. Whether the applicant is regulated by an appropriate foreign regulatory authority
1. Whether the applicant has been granted permission under the provision of the FERA, 1973 by the RBI for making investments in India as a FII.
1. Whether the applicant is :

• An institution established or incorporated outside India as Pension Fund/Mutual Fund / Investment Trust.
• An Asset management company or Nominee Company or Bank or Institutional Portfolio, established or incorporated outside India and proposing to make investments in India on behalf of Broad based funds.
• A trustee or Power of Attorney holder, incorporated or established outside India.

1. Whether the grant of the certificate to the applicant is in the interest of the securities market.

Where an application is made for grant of certificate under these regulations the Board shall as soon as possible but not later than 3 months after information called for by it is furnished, if satisfied that the application is complete in all respects, grant a certificate in Form B, subject to payment of fees in accordance with the Second Schedule.

The certificate and each renewal thereof shall be valid for a period of 5 years from the date of its grant or renewal, as the case may be.

1. Three months before the expiry of the period of the certificate, the FII if he so desires, may make an application for renewal in Form A.
1. The application for renewal shall de dealt with in the same manner as if it were first time application for grant of a certificate.
1. The Board shall on application, if satisfied that the applicant fulfils the specifies requirements, grant a certificate in Form B, subject to payment of fees in accordance with the Second Schedule.

The grant or renewal of certificate to the FII shall be subject to the following conditions namely

1. He shall abide by the provision of these regulations.
1. If any information or particulars previously submitted to the Board are found to be false or misleading in any material respect, he shall for with inform the Board in writing.
1. If there is any material change in the information previously furnished by him to the Board which has a bearing on the certificate granted by the Board, he shall forwith inform the Board.
1. He shall appoint a domestic custodian and before making any investments in India, enter into an agreement with a designated bank for the purpose for the purpose of operating a special non-resident rupee or foreign currency account.
1. Before making any investments in India on behalf of a sub-account, if any, he shall obtain registration of such sub-account, under these regulations.

1. Where an application for grant or renewal of a certificate does not satisfy the requirements specified, the Board may reject the application after giving the applicant a reasonable opportunity of being heard.
1. The decision to reject the application shall be communicated by the Board to the applicant in writing stating therein the grounds on which the application has been rejected.
1. The applicant who is aggrieved by the decision of the Board may within a period of 30 days from the date of receipt of the communications apply to the Board for reconsideration of the decision.
1. The Board shall as soon as possible, in the light of submissions made in the application for reconsideration and after giving reasonable opportunity of being heard convey its decision in writing to the applicant.

1. A FII shall seek from the Board registration of each sub-account on whose behalf he proposes to make investments in India.
1. Any sub-account which has been granted approval prior to the commencement of these regulations by the Board shall be deemed to have been granted registration as a sub-account by the Board under these regulations.
1. An application for registration as a sub-account shall contain particulars specified in Form A.

1. For the purpose of grant of registration the Board shall take into account all matters which are relevant to the grant of such registration to the sub-account and in particular the following, namely :

• the applicant is an institution / fund / portfolio established outside

• the applicant is a broad based fund.
• the FII is registered and holds a certificate granted by the Board.
• the FII for whom an application for registration of sub-account is made, is authorised to invest on behalf of the sub-account.

1. The board on being satisfied that the applicant is eligible for grant of registration shall grant registration to the sub-account.
1. A sub-account granted registration in accordance with the regulations shall be deemed to registered as an FII with SEBI for the limited purpose of availing of the benefits available to FII under section 115AD of Income Tax Act 1961.

A Foreign Institutional Investor shall not make investments in India without complying with the following provisions :

1. A FII may invest only in the following :

• securities in the primary and secondary markets including shares, debentures and warrants of companies listed or to be listed on a recognised stock exchange in India.
• units of schemes floated by domestic mutual funds including UTI, whether or not listed in a recognised stock exchange.

1. Notwithstanding the above, the total investment in equity and equity related instruments made by a FII in India, whether on his own account or on account of his sub-accounts, shall not be less than 70% of the aggregate of all the investments of the FIIs in India, made on his own account and on account of his sub-accounts.
1. In respect of investments in the secondary market, the following conditions shall apply :

• the FII shall transact business only on the basis of taking and giving deliveries of securities bought and sold and shall not engage in short selling in securities.
• no transactions on the stock exchange shall be carried forward.
• the transaction of business in securities shall be only through stock brokers who have been granted a certificate by the Board.

1. Unless otherwise approved by the Board, securities shall be registered :

• in the name of the FII, provided the FII is making investments on his own behalf, or;
• in his name on account of his sub-account, or in the name of his sub-account, in case he is investing on behalf of his sub-account. It should be noted that the names of the sub-accounts should be made known to the Board.

1. The purchase of equity shares of each company by a FII investing on his own account shall not exceed 5% of the total issued capital of a company.
1. In respect of a FII investing in equity shares of a company on behalf of his sub-accounts, the investment on behalf of each sub-account shall not exceed 5% of the total issued capital of the company.
1. The investment by the FII shall also be subject to GOI guidelines.

1. A FII or a global custodian acting on behalf of the FII shall enter into an agreement with a domestic custodian to act as custodian of securities for the FII.
1. The FII shall ensure that the domestic custodian takes steps for :

• Monitoring of investments of the FII in India.
• Reporting to the Board on a daily basis the transactions entered into by the FII.
• Preservation for five years records relating to his activities with the concerned FII.
• Furnishing to the Board information with regard to the activities of the FII if such information is called for.

1. A FII may appoint more than one domestic custodian with prior approval of the Board, but only one custodian may be appointed for a single sub-account of a FII.

A FII shall appoint a branch of a bank approved by the RBI for opening of foreign currency denominated accounts and special non-resident rupee accounts.

1. Every FII shall keep or maintain as the case may be, the following books of account, records and documents, namely :

• True and fair accounts relating to remittance of initial corpus for selling and realising capital gains of investment made from the corpus.
• Accounts of remittances to India for investments in India and realising capital gains on investments made from such remittances.
• Bank statement of such accounts.
• Contract notes relating to purchase and sale of securities.
• Communication from and to the domestic custodian regarding investments in securities.

1. The FII shall intimate to the Board in writing the place where such books, records and documents will be kept or maintained.

Subject to the provisions of any other law, for the time being in force, every FII shall preserve the books of account, records and documents specified for a minimum period of 5 years.

Every FII shall as and when required by the Board or the RBI submit to the Board or RBI as the case may be, any information, record or documents in relation to his activities as a FII as the Board or RBI may require.

An FII who :

1. Fails to comply with any condition subject to which the certificate has been granted, or;
1. Contravenes any of the provisions of the Act or these regulations shall be liable to penalty of:

1. suspension of certificate for a specified period, or;
2. cancellation of certificate,

after an inquiry as provided for in these regulations has been held.

A penalty of suspension of certificate of a FII may be imposed if he,

• Indulges in fraudulent transactions in securities.
• Fails to furnish any information related to his transaction in securities as required by the Board or the RBI.
• Furnishes false information to the Board.
• Does not co-operate in any inquiry conducted by the Board.

A penalty of cancellation of certificate of a FII may be imposed if he :

1. Indulges in deliberate manipulation or price rigging or cornering activities prejudicially affecting the securities market or the investors interest.
1. Is guilty of fraud or a criminal offence involving moral turpitude.
1. Does not meet the eligibility criteria laid down by the regulations.
1. Violates the provisions of the SEBI.
1. Is guilty of repeated defaults.

No order of penalty of suspension or cancellation of certificate shall be imposed on the FII except after holding an inquiry in accordance with the procedure prescribed.

1. For the purpose of holding an inquiry the board may appoint an inquiry officer.
1. The inquiry officer shall issue to the FII a notice at the principal place of business of the FII setting out the default alleged to have been committed by the FII and calling upon him to show cause why the specified penalties should not be imposed to him.
1. The FII may within 30 days from the date of receipt of such notice, furnish to the inquiry officer a reply, together with copies of documentary or other evidence relied on him in support of its reply.
1. The inquiry officer shall give a reasonable opportunity of hearing to the FII to enable him to make submission in support of his reply.
1. Before the inquiry officer the FII may either appear in person or through any other person authorised by him in writing.
1. The inquiry officer shall after taking into account all relevant facts and submissions made by the FII and the presiding officer submit a report to the Board and recommend the penalty if any to be awarded along with the justification for such penalty.

• On receipt of the report from the inquiry officer, the Board shall consider the same and issue a show cause notice to the FII as to why the penalty, which it considers appropriate and which shall be specified in the notice should not be noticed.
• The FII shall within 21 days of the date of the notice send its reply to the Board
• The Board shall after considering the reply to the notice, if received on time, shall as soon as possible but not later than 30 days from the receipt of the reply. if any, pass such order as it deems it fit.
• Every order passed by the Board shall be self-contained and give reasons for the conclusions stated therein including the justification for the penalty if any imposed by the order.

1. On and from the date of suspension of the certificate, the FII shall cease to buy, sell or otherwise deal in securities in India during the period of suspension.
1. The FII shall only deal for the purpose of liquidation of existing investments.

The order of suspension or cancellation of certificate shall be published by the Board in at least 2 daily newspapers.

• Tax holiday of upto 100% of taxable profits for the first 5 years.
• 30% in the following 5 years for plants commencing before 31st March, 1999.
• Liberal rates of depreciation.
• Reduced customs duty of 20% for power plant equipment.
• Coal based power plants are permitted to develop captive mines.

Foreign equity is permissible upto 50% for non-captive mines. However, in respect of captive mines, it can be allowed upto the same level as the processing unit to which it is captive.

• Private and foreign investment upto 49% are permissible in basic, cellular and radio page services.
• Automatic approval for manufacturing projects for equipment used in the Telecom industry is available through the RBI.(Most of them are high priority industries)
• GOI approval would be required for proposals involving foreign equity beyond 51% for manufacture of components and equipment’s used in Telecom industry as also for Telecom services.

Foreign investment in the following areas is approved by the Government :

• Merchant banking
• Under-writing
• Portfolio management services
• Investment advisory services
• Financial consultancy
• Stock broking
• Asset management companies of mutual funds
• Venture capital / Factoring / Leasing
• Credit reference agencies / Credit rating agencies

NRIs are allowed to have primary equity in a new banking company to the extent of 40%. In the case of a foreign banking company or a finance company acting as a technical collaboration or a co-promoter, equity participation is restricted to 20%.

Foreign companies can invest upto 100% of the equity in any venture in the petroleum sector. Approval is given by the Government.

No foreign investment in this sector is permitted. However, NRI investment is permitted subject to certain conditions.(For further details refer to chapter on NRI investment)

Foreign investment in the following infrastructural and operational areas is approved by the Government :

• Container terminals
• Cargo handling
• Dredging maintenance
• New port projects

While this has been reserved for the public sector, private and foreign investment is permitted for captive consumption only (generation of power), for washeries, etc.

Foreign investment in this sector upto 51% foreign equity is permitted by the RBI through the automatic approval route.

Hotels include :

• Restaurants
• Beach resorts
• Tourist complexes providing accommodation and/or catering and food facilities to tourists

Tourism related industry includes :

• Travel agencies, tour operating agencies and transport operating agencies.
• Units providing facilities for cultural, adventure and wild life experience to tourists.
• Leisure, entertainment, amusement, sports and health units for tourists
• Convention / Seminar units and organisations

Foreign technology agreements for the Hotel Industry are eligible for automatic approval by the RBI subject to the following criteria :

1. Technical and consultancy services including fees for architect, design supervision, etc. : Upto 3% of the capital costs of the project (less cost of land and finance)
1. Franchising and marketing / Publicity support fees : Upto 3% of net turnover (Net turnover is gross receipts less credit card charges, travel agents commission, sales tax, statutory payments, etc.)
1. Management Fees (including incentive fees) : Upto 10% of gross operating profit.

Foreign investment in this sector is approved by both the RBI and the Government.

Trading companies primarily engaged in export activities are permitted to have foreign equity upto 51% through the automatic route. This facility is allowed to export houses, trading houses, super trading houses and star trading houses registered under the provisions of the Import and Export Policy in force.

The approval is granted under the following conditions :

1. A new company will have to register itself with the Ministry of Commerce as an exporter / importer. Repatriation of dividend is permissible only after the company has acquired certification as an export house / trading house / super trading house / star trading house registered under the provisions of the Import and Export Policy in force.
1. In case of as an export house / trading house / super trading house / star trading house on receipt of the RBI approval, the company must pass a special resolution under Section 81(1)(A) of the Companies Act proposing preferential allocation of the required volume of fresh equity to the foreign investor.

• Applications for the approval will have to be submitted in Form FC(RBI) to the RBI.
• The RBI will receive necessary permission under the FERA 1973, for exemption under Sections 26(7), 28, 29 and 31 of FERA.

All other proposals for foreign investment in trading companies, which do not meet the criteria for automatic approval will have to go via the SIA / FIPB route.

The salient features are :

1. Duty free imports are permitted for all types of goods including capital goods required by the EHTP / STP units for their production provided they are not in the negative list of imports of the EXIM policy.
1. Second hand capital goods can be imported in accordance with the policy.
1. The entire production shall be exported to hard currency areas. Sales in the DTA are permissible as per the norms decided by the Department of Electronics and subject to the fulfilment of the value added criterion.
1. Units should operate in customs bonded premises.
1. Tax holiday is admissible for such units for a block of 5 years in the first 8 years of operation.
1. Deemed export benefits are also permissible.
1. 100% foreign equity participation is permissible under the scheme.

Applications should be submitted to the SIA along with a

• Crossed demand draft for Rs. 2500, if the item of manufacture requires a letter of intent.
• Crossed demand draft for Rs. 1000, if the item of manufacture does not require a letter of intent.

• Commercial bank loans.
• Suppliers credit.
• Securitised instruments like Floating Rate Loans (FRNs), and fixed rate bonds.
• Commercial borrowings from financial institutions like ADB, IFC, etc.
• FCCBs would be an approved instrument for accessing ECB. The terms and conditions normally applicable to ECB (such as restricting end-use to import of capital goods, minimum maturity, etc.) would be applicable to FCCBs as well. Priority for access to this facility would be given to firms with good foreign exchange earnings record or potential.

The policy on ECB would be governed by the following principles :

• Infrastructure or core sectors would include power, oil exploration and refining, telecommunications, fertilisers and transport.
• By export oriented units we mean 100% EOUs and would also include others with defined export obligations.
• Developmental financial institutions through their lines of credit are expected to give priority to the needs of medium and small units.
• In each of the above categories, preference would be given to units resorting to ECB as a residual source after exhausting external equity as the main source of finance especially for large value projects.

1. The choice of the sourcing of the ECB, currency of the loan and the interest rate basis (floating or fixed rates) will generally be left to borrowers.
1. The choice of security to be provided to external commercial lenders will be left to borrowers. However, where the security is in the form of a guarantee from an Indian financial institution / Indian scheduled commercial bank, there should be no counter-guarantee or confirmation of the guarantee by any institution / bank abroad.
1. Prepayment of foreign currency loans where the outstanding do not exceed US $ 1 million, or equivalent thereof, may be permitted by the Government, provided there are no penalties for prepayment. (This is done on a case to case basis)
1. The practice of a firm borrowing overseas for financing its Rupee requirements and swapping its ECB with another firm which requires foreign currency resources is not permitted. Only the infrastructure sectors (telecom, railways and oil companies engaged in exploration and development work) have the freedom to swap dollar borrowings to fund Rupee expenditure.
1. The Government does not generally extend sovereign guarantees to borrowings by enterprises. Exceptions are made in select cases on considerations of special terms of the loan or the nature of public sector undertaking raising the borrowing.
1. All interest payments and fees related to the ECB would be eligible for tax exemption under Section 10(15)(iv)(b) to (g) of the Income Tax Act, 1961.
1. Refinancing of outstanding amounts under existing loans by raising fresh loans at lower costs may be permitted on a case to case basis, subject to the condition that the outstanding maturity of the original loan is maintained.
1. Rolling over of the ECB is not permitted.

External Commercial Borrowings (ECBs) are governed by guidelines on External Commercial Borrowings Policy and Procedure issued in June 1996. The Guidelines are aimed at increasing transparency in policy and simplifying the procedure to give Indian Industry easier access to external funds to support investment and economic activity. These guidelines include a new window of ECB upto US$ 3 million, which was introduced to help small and medium firms and also to provide greater flexibility for small sized borrowings.

All Corporates and Institutions have been permitted to raise ECBs upto US$ 3million. At minimum simple maturity of 3 yrs. Borrowers have been permitted to utilise the proceeds under such arrangement for rupee expenditure, subject to the condition that only one such loan is outstanding at any point of time. When such loans are provide by NRIs, Joint Venture partners, etc. they have to be routed through an internationally recognised bank.

As per the existing arrangement, borrowers under the scheme first get an approval from the Ministry of Finance and the approach the RBI for formal clearance under FERA. In order to avoid this dual approval, the Government has now decided to delegate the sanctioning power to RBI for the US$ 3 million scheme. A separate cell has been set up in the Central Office of RBI, Mumbai, to process these applications expeditiously.

Corporates who have raised ECB through bond / FRN issues are permitted to use the same for project related rupee expenditure till actual import of capital equipment’s takes place or upto one year whichever is less. Sanction of additional ECB would be considered only after the company has certified through its statutory auditor that it has fully utilised the amount for import of capital goods and services.

Borrowers must file a statement in the prescribed form with the Department of Economic Affairs.

1. The approval of the Department of Economic Affairs for all credit proposals will continue to be necessary where the loan is taken directly from a foreign lender by either the borrower as a actual user of the loan or by a financial intermediary signing a framework credit agreement. In the case of the latter, sub-borrowers under framework credit arrangements would not need separate approvals from the Government.
1. Applications should be addressed to the Joint Secretary (ECB), Department of Economic Affairs, Ministry of Finance, North Block, New Delhi. Applications should contain the following details :

• Approvals of the relevant authorities for the import, where such approval is required.
• Details of offer from one or more lenders.
• Copies of the project appraisal report from a recognised FI/bank, if applicable.
• Details of contact person/office with telephone numbers to enable quick reference to be made, if clarifications are needed.
• The approval letter will be issued by the ECB Division of the Department of Economic Affairs, Ministry of Finance.

Borrowers must file a statement with the RBI within 2 weeks of signing the loan agreement detailing the final terms of the loan agreed, the repayment schedule and obtain an acknowledgement to this effect. This obligation will have to complied with as a condition precedent to drawing the loan.

1. This is required to obtain approval under the FERA, 1973
1. Monitoring of end use of ECB will continue to be done by the RBI.

1. Approvals are valid for an initial period of three months i.e. the executed copy of loan agreement is expected to be submitted within this period
1. In the case of FRNs, bonds, etc. the same are expected to be launched within this period.
1. Extensions of approval beyond a period of three months from the date of approval will not be permissible.

• At the expiry of the validity of the approval, a fresh permission will be needed which will be evaluated in the light of criteria being applied at that time.
• However, in the case of FRN / bonds, because of delay on account of exceptional circumstances, the approval may be extended for a period of three months, on a request by the applicant explaining the reasons for the delay.

Corporates are encouraged to undertake liability management for hedging the interest and / or exchange rate risk on their underlying foreign currency exposure. Prior approval of this department may be obtained before entering into such transactions. After obtaining the approvals, they would follow the FERA guidelines of RBI for release of foreign exchange.

• The annual ceiling has been informally fixed at $7 billion for 1996-97.
• Like last year, the ministry proposes to earmark a portion of the annual cap for the telecom ($ 1 - 1.5 billion) and power ($ 2.5 billion) sector.
• These policies and procedures will be operative from 19th June, 1996.