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The Foreign Exchange Management Act, 1999 (FEMA), forms the statutory basis of foreign exchange management in India. The RBI which is the apex banking authority administers the foreign exchange management regulations jointly with the Government of India.
India does not have full capital account convertibility as yet. However, there have been significant relaxations in the recent past for drawal of foreign exchange for both current account as well as capital account transactions.
The payments due in connection with foreign trade, other current business, services, etc. are regarded as Current Account transactions. As per the Current Account Transaction Rules, the withdrawal of foreign exchange for current account transactions is regulated as under:
Prescribed schedule of
Current account rules
Drawal of foreign
exchange for
Approving authority
Schedule I Transactions which
are prohibited
N.A.
Schedule II Transactions which
require prior approval
of the Central
Government:
Concerned Ministry or
Department of
Government
Schedule III Transactions which
require prior approval
of the RBI:
RBI

In case of certain transactions listed in Schedule II and III, prior approval is not required if the payment is made out of foreign exchange funds held in Exchange Earner’s Foreign Currency EEFC account of the Remitter.
Remittances for all other current Account transactions can generally be made directly through the Authorized Dealers (Bankers) without any specific prior approval. Some of the relevant Current Account payments are discussed hereunder.

Dividends

Dividends declared by an Indian Company can be freely remitted overseas to foreign shareholders without any specific prior approval. There is currently no dividend balancing currently in vogue.

Foreign technology collaboration

The Government has liberalised the policy on Foreign Technology Collaboration (FTC) and it now permits all payments for royalty, lump-sum fee for transfer of technology and payments for use of trademark/brand name under the Automatic Route without any restrictions. An independent reporting mechanism is proposed to be put in place to monitor remittances / compliance.

Consultancy services

Remittance upto USD 1 million per project (USD 10 million for specified infrastructure projects) can be made without any prior approval of the RBI. However, no such prior approval is necessary if the remittance exceeding this ceiling is made out of an EEFC account of the Remitter.

Import of goods

Payments in connection with import of goods and services in the ordinary course of business are generally permissible and can be undertaken freely through direct filing of required documents with the Authorized Dealer / Banker. The Foreign Exchange Management regulations regulate the period of settlement, rate of interest thatcan be charged, advance that can be made, etc.

Netting-off overseas receivable and payables

Generally, netting-off of foreign exchange receivables against foreign exchange payables is not permitted. The exporter is obliged to realize the entire export proceeds and the importer is obliged to pay for the import of goods and services separately. Specific relaxation exists in the regulations for some cases like units in SEZs. The RBI can also give case specific approvals for netting off based on industry requirement/practice and internal norms.

Portfolio investment in India:

FII registered with SEBI and NRIs are eligible to invest in India under the PIS within prescribed guidelines and parameters. Investment by FIIs are primarily governed by the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, (‘SEBI Regulations’). Eligible Institutional Investors that can register as FIIs include, Pension Funds, Mutual Funds, Investment Trusts ,Banks, Charitable Societies, Foreign Central Bank, Sovereign Wealth funds,, University Funds, Endowments, Foundations, Charitable Trusts Insurance Companies, Re-insurance Companies, Foreign Government Agencies, International or Multilateral Organisations/ Agency, Broad based Funds, Asset Management Companies Investment Managers/Advisors Institutional Portfolio Managers and Trustee of a Trust.

Sub-account means any person resident outside India, on whose behalf investments are proposed to be made in India by a FII and who is registered as a sub-account under these regulations. Entities eligible to register as sub-account are Broad Based Funds, Broad Based Portfolios, Proprietary Funds of the FII, University Funds, Foreign Corporates, Endowments, Foundations, Charitable Trusts, Charitable Societies, Sovereign Wealth Funds and Foreign Individuals satisfying the prescribed conditions. Conceptually, an application for registration as an FII can be made in two capacities, namely as an investor or for investing on behalf of its sub-accounts.

SEBI grants registration as FII based on certain criteria, namely constitution and incorporation of FII, track record, professional competence, financial soundness, experience, general reputation of fairness and integrity, being regulated in home country by appropriate foreign regulatory authority,, legal permissibility to investin securities as per the norms of the country of its incorporation, fit and proper person, etc. SEBI grants registration to the FII and subaccount which is permanent unless suspended or cancelled by SEBI, subject to payment of fees and filing information every three years. The approval of the sub-account is co-terminus with that of the FII.

FIIs / sub-accounts can invest in Indian equities, units, exchange traded derivatives, commercial papers and debt. FIIs can also invest in security receipts of Asset Reconstruction Companies on its own behalf.

A FII can invest any portion of its portfolio in debt instruments as the requirement to maintain 70:30 (equity: debt) investment limit by pure equity FIIs has been removed by SEBI subject to limits being sanctioned by SEBI..

Foreign investment policy on FII investment

FII investments in India are subject to the following policy/limits:

  • As per RBI, no single FII/sub-account can acquire more than 10 percent of the paid-up equity capital or 10 percent of the paid-up value of each series of convertible debentures issued by the Indian company. In case of foreign corporate or individuals, each such sub-account shall not invest more than 5 percent of the total issued capital of that company.
  • All FIIs and their sub-accounts taken together cannot acquire more than 24 percent of the paid-up capital or paid up value of each series of convertible debentures of an Indian Company. The investment can be increased upto the sectoral cap/statutory ceiling, as applicable to the concerned Indian company. This can be done by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body. Also, in certain cases, the permissible FDI ceiling subsumes or includes a separate sub-ceiling for the FII Investment as per stipulation which needs to be complied with. As per the new Consolidated FDI Policy Framework (effective from 1st April 2010) 10 percent individual limit and 24 percent aggregate limit for FII investment shall be applicable even when FIIs invest under the FDI scheme/policy.
  • FIIs/sub-accounts can transact in dematerialized form through a recognized stock broker and on a recognized stock exchange and are required to give or take delivery of securities. Further, short selling is permitted within prescribed parameters/norms. FIIs /sub-accounts can also lend or borrow securities in the Indian market under a scheme framed by SEBI.
  • FIIs can buy/sell securities on Stock Exchanges in most sectors except those prohibited. They can also invest in listed and unlisted securities outside Stock Exchanges subject to prescribed guidelines/compliances/approvals.

Annexure I – Illustrative sector-wise regulation for FDI

Sectors prohibited for FDI (Illustrative):

  • Real estate business and construction of farm houses
  • Nidhi company and business of chit fund
  • Atomic energy
  • Trading in transferable development rights
  • Lottery, gambling and betting including casino
  • Agriculture (excluding permissible under automatic route) and plantations (other than tea plantations under Approval Route)
  • Retail trading (except 51 percent in Single Brand Product Retailing under Approval Route)
  • Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

Sectors falling under the Automatic Route for FDI (Illustrative) (100 percent unless specified)

Agriculture

  • Floriculture, horticulture, development of seeds, animal husbandry, pisciculture, aqua-culture, cultivation of vegetables & mushrooms
  • (specified) and services related to agro and allied sectors

Manufacturing

  • Alcohol distillation and brewing
  • Coffee, rubber processing and warehousing
  • Drugs and pharmaceuticals including those involving use of recombinant technology
  • Hazardous Chemicals (specified)
  • Industrial explosives

Mining

  • Coal and lignite mining for captive consumption by power projects; iron & steel and cement units and other specified activities
  • Setting up coal processing plants like washeries subject to conditions
  • Mining and exploration of metal, non-metal ores including diamonds, precious stones, gold, silver and minerals

Power

  • Power including generation (except atomic energy), transmission, distribution and Power Trading

Service Sector

  • Advertising and Films
  • Business services (e.g. data processing, software development, consulting, market research, technical testing, etc.)
  • Construction and maintenance of roads, bridges, etc.; Ports and harbours related activities; Mass Rapid Transport Systems in metropolitan cities; etc.
  • Development of Township, Housing, Built-up Infrastructure and construction development projects
  • Development of Special Economic Zones
  • Health and medical services
  • Hotel and Tourism related industry
  • Industrial parks
  • Insurance (26 percent)
  • Non banking finance companies (as specified – e.g. Stock broking, finance, etc.)
  • Research and development services
  • Storage and warehouse services
  • Transport and transport support services

Sector falling under either Automatic Route and / or Approval Route (also refer Notes below)

Sector heading Sector sub-heading Automatic Route (%) Approval Route (%)
Airports • Greenfield
• Existing
100
74

up to 100
Air Transport Services • Scheduled
• Non-scheduled / chartered and cargo airlines
• Helicopter services / seaplane services (specified)
49 (NRIs – 100%)
49
100

up to 74
Asset reconstruction companies 49
Banking (subject to RBI
approval/conditions)
• Private sector
• Public sector
74 / 100

20
Broadcasting • Headend-In-The-Sky
• FM Radio
• Cable network and direct-To-home
• Hardware facilities such as uplinking of HUB / Teleports
• Hardware facilities such as uplinking a news and current affairs TV channel
• Hardware facilities such as uplinking a non-news and current affairs TV channel
49




up to 74
20
49
49
26
100
Civil aviation services • Ground Handling services
• Maintenance and repair organisations, flying training institutes, and technical
training institutions
49
100
up to 74
Commodity exchanges 49
Courier services other than those covered by Indian Post Office Act, 1898 100
Credit information companies 49
Defense manufacturing 26
Infrastructure companies in securities markets, namely, Stock Exchanges, Depositories and Clearing Corporations 49
Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities 100
Petroleum and natural gas • Private sector (Exploration / Refining)
• Public Sector Undertakings (Refining)
100

49
Print media • Publishing newspapers & periodicals dealing with news and current affairs
• Publishing Indian edition of foreign magazines
• Publishing of scientific magazines, specialty journals / periodicals
• Publishing facsimile edition of foreign newspaper



26
26
100
100
Satellite establishment and operation 74
Security agencies in private sector 49
Tea sector including tea plantation 100
Telecommunication • Basic, cellular services unified access services, value added and other specified
services
• ISP with or without gateways, radio paging, end to end bandwidth
• Infrastructure provider (specified), electronic mail and voice mail
49
49
49
up to 74
up to 74
up to 100
Trading • Wholesale Trading and Cash & Carry wholesale Trading including E-commerce
activities (subject to detailed guidelines)
• For exports
• For items sourced from small scale sector
• Test marketing of items for which company has approval for manufacture
• Single Brand Product Retailing
100
100




100
100
51

Note:
1. Certain sectoral cap include investments by NRI, FII, FVCI investments having underlying cap on FDI investments and NRI, FII, FVCI investments.
2. Sectoral caps are subject to detailed guidelines, other conditions, sectoral laws, licensing and other requirements (e.g. divestment) hence readers are requested to refer to detailed policy guidelines before acting upon.

Source: Circular 1 of 2010 issued by the Department of Industrial Policy and Promotion, Ministry of Finance, Government of India on 31 March 2010.

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