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BORROWING, LENDING AND GUARANTEES
Opening up of economy and globalisation necessitate movement of funds
in the form of borrowing and lending to meet the needs of funds, for
reason of comparative cost and meeting requirement of funds in foreign
countries. The process of liberalising polices and procedures in this
regard began with permission for External Commercial Borrowings (ECB)
FOR Indian corporates for fresh investment as well as expansion of
existing capacity and guidelines were issued from time to time.
Borrowing / lending being capital account transaction is subject to
provisions of section 6(3) of FEMA and the regulations contained in
Notification FEMA 3/2000-RB dates 03.05.2000 thereunder.
BORROWING IN FOREIGN EXCHANGE
In terms of regulations framed by RBI, approval of RBI / Central
Government would be necessary for any borrowing or lending in foreign
exchange by a resident person. This is subject to exceptions in case of
class of persons who have been given general permission to borrowing or
lend, which will be referred to as automatic route. The Automatic route
eligibility norms are as under: -
AUTOMATIC ROUTE
1.
Borrowing by Authorised Dealer (AD) in India or by its branches outside
India: -
AD may borrow upto 15% of its unimpaired tier I Capital or US$10
million, whichever is more from H.O. or branch or correspondent outside
India. This may be subject to conditions as may be imposed by RBI.
Borrowing beyond this limits from the aforementioned sources is
permitted for the purpose of replenishing the rupee resources, provided
that the funds are utilized for own business operations and not for
investment in call money or other markets or for repayment of loan.
Utilisation for investment or repayment will require prior approval of
RBI.
A branch outside India of an A.D. being an Indian bank can borrow in
the normal course of its business activity subject to directions or
guidelines issued by RBI and the Regulatory authority of the country
where the branch is located.
Further an AD can borrow from a bank of F.I. outside India for
granting pre-shipment or post-shipment credit in foreign currency to his
exporter constituent
2.
Borrowing by persons other than A.Ds.:-
(i)
A resident person may borrow by way of loan or overdraft or any other
credit facility, from a bank outside India for execution of any turnkey
project or civil construction contract or for export on deferred payment
terms.
(ii)
An importer in India may avail of foreign currency credit for a period
not extending six months extended by foreign supplier.
(iii)
Any entity registered under companies Act, Societies Registration Act,
Co-operative societies Act including proprietary concerns or
partnerships can raise fresh ECBs to refinance existing ECBs for
prepayment or to refinance existing ECBs subject to following
conditions:-
(a)
the average maturity should be not less than 3 years.
(b)
the amount is upto US $50 million.
(c)
It is raised for refinancing existing ECB.
(d)
It is raised from internationally acceptable or recognised lender and
organized through a reputed merchant banker registered with regulatory
authority of notified countries.
The RBI has vide AP (DIR series) circular no 23 dated September 17,
2002 clarified that individuals, trusts and non-profit making
organizations are not eligible to raise ECBs.
The borrower is required to submit 3 copies of loan agreement through
his AD to the RBI and should file quarterly returns with his AD.
Concerned guidelines, regulations, circulars etc should be complied
with.
(iv)
A resident can borrow upto US $250000 from their close relatives outside
India provided the loan is free of interest and is not repayable before
seven years. By press Release dated 6/9/2002 the RBI has reduced the
minimum repayment period from 7 years to 1 year only.
Approval route – approval from RBI
Approval of RBI is required under following schemes for External
Commercial Borrowings (ECB). Application should be made in form ECB.
(i)
Short term loan scheme-
(a)
in the form of credit extended to Indian importer by overseas supplier,
maturity period of which is more than six months but less than 3 years.
(b)
In the form of loan / credit extended to an Indian importer by any bank
or F.I. outside India which is of less than 3 year’s maturity.
The suppliers credit as per A and the buyers credit as per B can be
approved by the Authorised Dealer if the amount of credit does not
exceed US $20 million for import transaction and the all-in-cost per
annum does not exceed LIBOR plus 50 basis for credit upto one year and
LIBOR plus 125 basis points for credits beyond one year. In case the
short term credit required is more than US $20 million for any import
transaction the application in form ECB will have to be forwarded to the
Chief General Manager, Exchange Control Dept., Reserve Bank of India,
Central Office, ECB Division, Mumbai – 400 001.
(ii)
US $ 5m.scheme-
Borrowing under this scheme upto 5 million US $ is
permitted for general corporate purpose for simple minimum period of 3
years.
(iii)
US $ 10 million scheme or it’s equivalent
Borrowing by Indian entity upto 10 million US $ can be
permitted for the following purposes:-
(a)
for financing infrastructure projects –
(i)
in the form of equity investment in subsidiary / J.V promoted for
implementing infrastructure project.
The average maturity of loan should be minimum 3 years and in case
the loan is raised by several promoters for a single project, the total
should not be more than 10 million US $.
(ii)
financing infrastructure project. The average maturity of loan should be
minimum 3 years.
(b)
for export-
Borrowing by exporters / foreign exchange earners is permitted upto 3
times the average foreign exchange earning of previous 3 years or US$10
million, whichever is lower. Such borrowing should also be of average
maturity of minimum 3 years.
(c)
for general corporate purposes-
Such borrowing should be at minimum average maturity of eight years.
The government recently liberalised the ECB regime to allow companies
to access this route for acquisition of PUS shares which are on the
block. More recently, this route has been permitted to fund integrated
townships proposals for which will be subject to ‘special
permission’ on a case-by-case basis to rule out speculation in realty
markets by foreign investors and lenders.
PRE-PAYMENT OF ECB
The RBI has brought the pre-payment of ECB under the
automatic route on an experimental basis. The relaxation is available to
corporates upto March 2003 and could be upto:-
a)
The amount of inflow of foreign exchange in the form of foreign
investment.
b)
The balance held in EEFC account.
c)
US$ 50 million where the corporates are permitted to make prepayment in
the extent of 10% of outstanding loan.
d)
US$ 50 million where the residual maturity of loan does not exceed one
year.
The designated branches of Ads may allow such remittance for
prepayment of ECBs without RBIs approval after obtaining a certificate
from the company secretary/auditor of the borrower to the effect that he
availed and utilized the loan in accordance with all relevant acts rules
in force and that he has submitted all the ECB-2 returns to the
concerned regional office of reserve bank.
Vide AP(DIR series) circular no.22 dated September 17,2002 the
automatic route has been further liberalized. The same will now be
available to all categories of borrowers irrespective of the residual
maturity or percentage of the outstanding loan as long as the amount
being prepaid does exceed US$ 100 millions. Borrowers desirous of
availing of this facility in respect of amount exceeding US$ 100 million
should apply to RBI Central Office Mumbai with full particulars of loan
Etc. Corporates can obtain ‘inprinciple’ approval from RBI before
negotiating a prepayment contract. The inprinciple approval will be
valid for 15 days.
LENDING IN FOREIGN EXCHANGE
a)
Lending by Authorised dealers in India:
An A.D. being a bank incorporated in India or its branch may lend in
foreign currency
i)
in the normal course of its banking business outside India.
ii)
to his Indian constituent for
- meeting their
foreign exchange requirement
- for their
rupee working capital requirement
- for meeting
capital expenditure
subject to norms, interest rate directives and guidelines issued by
the RBI.
iii)
extend credit facilities to WOS/JV abroad provided that not less than
51% equity in such subsidiary/JV is held by Indian entity in accordance
with FEMA regulations.
iv)
To his constituents maintaining RFC account against the Security of
funds held therein.
v)
Against the security of funds held in NRE / FCNR deposit accounts vide
AP(DIR Series) Circular No.24 dated September 25, 2002. Ads have been
permitted to grant foreign currency loans in India also against the
security of funds held in FCNR (B) deposit accounts to the account
holders only. The maturity of the loan cannot exceed the maturity of the
deposit under any circumstance. Loan can be sanctioned to the
accountholder for the purposes other than investment in India and
repayment has to be effected by fresh remittance in foreign exchange or
by adjustment of the deposit.
vi)
An AD in India may extend loan to another AD in India subject to
directions and guidelines issued by RBI in this regard.
b)
Lending by persons other than AD or their branches.
i)
An Indian entity may lend to its WOS / JV abroad constituted in
accordance with FEM (Transfer or issue of Foreign Security)
Regulations2000.
ii)
A resident person may end out of funds held in his EEFC account for
trade related purposes to his overseas importer customer provided.
- the aggregate
amount of such loans outstanding at any point of time does not exceed
US$3 million.
- If the loan
exceeds US$25000, a guarantee of a foreign bank of international repute
is provided by the overseas borrower.
iii)
EXIM Bank of India, IDBI, IFCI, ICICI, SIDBI or any other institution in
India may extend loan to their constituents in India out of foreign
currency borrowings raised by them with Central Government approval for
the purpose of onward lending.
iv)
From NRIs on repatriation basis –
Such borrowing not exceeding US$2,50,000 can be permitted for
personal purposes or normal business activity by an individual resident
from his close relative (as defined in section 6 of Companies Act.) The
minimum maturity period should be 7 years, it should be free of
interest, received in free foreign exchange through normal banking
channels or by transfer from NRE / FCNR account. The loan should not be
utilised for –
a) carrying on agriculture / plantation
activities
b) purchase of immovable property or
shares / debenture of Indian companies.
c) relending.
v)
Funds borrowed under any of the aforesaid scheme shall not be utilised
for investment in stock market or in real estate business.
Any other Foreign Currency loan proposed to be raised by a resident
person shall require the prior approval of the Central Govt.
BORROWING IN INDIAN RUPEE
Section 6(3)(e) of FEMA 1999 authorises the RBI to prohibit, restrict
or regulate any borrowing or lending in Indian rupee between a PRII and
PROL. In exercise of that power RBI has issues Notification No. FEMA 4 /
2000 RB dt. 03.05.2000.
Since RBI has continued with most of its guidelines set out in the
Exchange control manual and erstwhile FERA notifications it is advisable
to make a reference to notification No.FERA 200/99 – RB dt. 30.03.99
dealing with borrowing from NRIs on non–repatriation basis and also to
erstwhile notification No.FERA 213/99-RB dated.01-11-99 for borrowing by
Indian companies from NRIs / OCBs by way of investment in
Non-convertible debentures.
Borrowing in Indian rupee is permitted –
(a)
By persons other than a company-
Such a person can take rupee loan from NRI or PIO on non-repatriation
basis. Interest earned on such loan (being a current account
transaction) is however allowed to be repatriated except when the amount
was received out of funds held in NRSR account. The borrowed amount
should be received either by way of inward remittance or out of funds
held in NRE / NOR / FCNR / NRSR account. Such borrowings should be only
for short-term requirement and should be repayable within 3 years. The
maximum amount of interest can be two percentage points over the
prevailing bank rate.
b)
By Indian Companies –
A company incorporated in India can borrow in rupees on repatriation
or non-repatriation basis from NRIs / OCBs or PsOI. Such borrowing
however can be only be way of investment in Non-convertible Debentures (NCD).
Following conditions must be satisfied :-
i)
the issue of NCD is by public offer
ii)
the rate of interest does not exceed 300 basis points over the PLR of
SBI.
iii)
the maturity period is minimum 3 years.
iv)
the company is not Nidhi / Chit fund and not engaged its agriculture /
plantation / real estate business or trading in transferable development
rights (TDR).
v)
the Company files within 30 days of remittance and within 30 days of
issue of NCD full details of remittance and issue respectively and a
certificate from company secretary stating that all regulations have
been complied with.
vi)
If the loan is on repatriation basis –
i)
the percentage of NCDs issued to NRIs/OCBs to the total paid up value of
each series should not exceed the ceiling perscribed for FDI in India.
ii)
The remittance should have come either from outside India or from NRE /
FCNR account.
And if the loan is on non-repatriation basis-
i)
Remittance should have come either from outside India or from NRE / FCNR
/ NRO / NRSR Account.
ii)
Interest on investment made out of NRSR account will not be allowed to
be repatriated.
The borrowed funds can be used only business purposes except the
business of Chit fund or as Nidhi Company or in agriculture / plantation
activities or real estate business (not being development of townships,
construction of residential / commercial premises, roads or bridges)
construction of houses or trading in Transferable Development Rights (TDR).
If can also not be used as capital investment in any company / firm /
proprietorships concern or for relending.
LENDING IN RUPEE
Loan to NRI against security of shares or immovable property: -
An AD in India may grant loan to a NRI against the security of :-
(a)
Shares / debentures held in his name.
(b)
Immovable property (other than agricultural / plantation, farm houses)
held by him in accordance with relevant provisions.
This will be subject to following conditions: -
(a)
the loan should be utilised for personal requirement or own business.
(b)
The loan should not be utilised for prohibited activities viz. Business
or construction of farm houses or trading in transferable development
rights (TDR).
(c)
RBI directives on advances against shares should be complied with.
(d)
The loan amount should not be credited to NRE / FCNR account.
(e)
The loan amount should not be remitted out of India.
(f)
Repayment should be made either from foreign exchange remittance from
abroad, or by debit to NRO / NRSR / NRE / FCNR account or out of sale
proceed of the asset against which the loan was granted.
b.
Housing Loan to NRI or PIO
Loan may be granted to NRI / PIO by an AD or an approved housing
finance institution for acquisition of residential accommodation on
following conditions: -
(a) the term of loan
including quantum, margin money, period of repayment should be at par
with loan to residents.
(b) The loan amount
should not be credited to NRE / FCNR account of the borrower.
(c) The loan should
be fully secured by equitable mortgage of the concerned property, or, if
necessary, by lien on other assets.
(d) The installment,
interest etc. should be made from foreign remittance or out of its
rental income.
(e) The rate of
interest should conform to RBI / NHB directives.
Continuance of loan on borrower becoming non-resident.
Such continuance can be allowed by an AD / authorised bank on
following conditions: -
(a) The AD is satisfied about reason
for such continuance.
(b) The period of continuance does not
result in extending the originally fixed period of loan.
(c) If the loan is repaid while a
non-resident, it will be out of foreign remittance or from funds held in
NRE / FCNR / NRO / NRSR account.
Continuance of loan on lender becoming non-resident
In case of resident lender becoming non-resident, the payment is
required to be made by credit to NRO/ NRSR account of the lender at the
lender’s option.
GUARANTEE
Foreign Exchange Management (Guarantee) Regulation 2000 issued vide
notification No. FEMA 8/2000-RB dated 3-5-2000 dealing with guarantees
provide for general prohibition for resident persons to give a guarantee
or surety in respect of, or undertake a transaction, which has the
effect of guaranteeing a debt, obligation or other liability owed by a
resident to non-resident or vice versa.
Permission to Authorised dealer give guarantee:-
1.
An AD may give a guarantee in respect of debt/ liability owed by a
resident to a non- resident in the following cases-
i)
if the liability is incurred as an exporter on account of exports from
India.
ii)
If incurred as an importer in respect of import on deferred payment
terms in accordance with RBI’s approval.
2.
An AD may give guarantee in respect of debt/ liability owed by
non-resident in following case.
i)
where it is owed to a resident in connection with a bonafide trade
transaction.
Such a guarantee can be given only where it is covered by a counter
guarantee of reputed bank abroad.
ii) as a
counter guarantee to cover guarantee issued by his branch or constituent
outside India on behalf of Indian exporter because guarantee of only
resident banks are acceptable to overseas buyers.
3.
Guarantee may be given by AD in following cases also: -
i)
on behalf of his customer or branch or correspondent outside India in
respect of missing or defective document or authenticity of signatures.
ii)
In favour of organisations issuing travellers cheques for sale in India
by AD or his constituents who are authorised persons.
Permission to others to give guarantee
Following person other than AD can give guarantee-
i)
A resident Exporting
For
performance of a project outside India
Company
or for availing fund based or non-fund based credit facility from a bank
or a F.I. in connection therewith. For this the project needs to be
approved by approving authority referred to in FEM (export of goods and
services) Regulation 2000.
ii) A Company in
India
In connection with business of WOS/JV promoted by it outside
India. Such guarantee can be given by AD also.
On behalf of a supping or airline company
iii) An agent in
India
incorporated outside India in connection with its debt liability owed to
any statutory or government authority in India.
January 2003
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