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RECENT

DEVELOPMENTS
RELATED TO FEMA
SUBMITTED BY:
SUMIT ARORA
ROLL NO:37
GBO:2ND YEAR
DOCUMENTATION
RECENT CHANGES:
(SOURCE:www.proactivesolutech.com/newsletter/newsapr
.htm)
Extension of Time for realisation of Export Proceeds

 As per the FEMA Regulations, every exporter of goods / services is
required to realize and repatriate back to India, the export proceeds within
a period of 6 months from the date of export. In case the exporter is unable
to realize the export proceeds within such time period, then, he is required
to apply to the RBI seeking extension of time.
 However, the RBI has now liberalized the said provision vide APDIR
Circular No: 20, dated January 28th 2002. The concerned Authorized
Dealer through whom the export has been made, is now permitted to grant
extension of time, subject to certain conditions.
Value of Export Category Extension Granted Conditions to be satisfied Period of Extension
by

Not exceeding US General Authorized Dealer • Up to 3 months at a time
$ 1 Lakh • AD is to be satisfied that • In case the extension is beyond 1 year
realization was not possible due from the date of export, then, the
to reasons beyond the control of total export outstanding of the
the Exporter Exporter should not be more than
• Exporter submits a declaration 10% of the average of export
that he will realize export realizations during the preceding 3
proceeds during the extended financial years.
period

Where the Invoices Regional Office of
are under RBI
investigation
by ED
/CBI/Other
Agencies

Exceeding US $ 1 Where Exporter has Authorized Dealer
Lakh filed a case • Up to 6 months at a time
against the • In case the extension is beyond 1
Importer year from the date of export, then,
abroad the total export out standings of the
Exporter should not be more than
10% of the average of export
realizations during the preceding 3
financial years.

General Regional Office of
RBI
Opening of Foreign Currency Accounts Outside India
 Earlier, Indian Companies which needed to open foreign currency accounts
outside India needed to take the approval of the RBI. This was a
cumbersome and time consuming process.
 This has now been liberalized by the Foreign Exchange Management
(Foreign Currency Accounts by a Person Resident in India) (Second
Amendment) Regulations, 2001issued by the RBI on December 5th 2001.
 Under these regulations, an Indian Entity can now open a Bank Account
outside India without any prior approval from the RBI / Authorize Dealer,
subject to the following limits on remittances :
Type of Company setting up Source of Remittance Amount which can be remitted Amount which can be
the overseas office for initial expenses remitted for recurring
expenses

A 100% EOU or a unit in EPZ or From out of its Current A/c No Limit No Limit
in a Hardware Technology or out of its
Park or in a Software EEFC(exchange
Technology Park, within earner foreign
two years of establishment currency account) A/c
of the Unit

Other Companies From out of its Current A/c 2 per cent of the average annual 1 per cent of the average
sales/income or turnover annual sales/income or
during last two accounting turnover during last two
years of the Indian Entity. accounting years of the
Indian Entity.

From out of its EEFC A/c No Limit No Limit

Additional Conditions to be satisfied
The overseas branch/office/representative shall not enter in any contract or agreement
in contravention of the Act, Rules or Regulations made there under; The account so
opened, held or maintained shall be closed, if the overseas branch./office is not set up
within six months of opening the account, or within one month of closure of the
overseas branch/office, or Where no representative is posted for six months. And the
balance held in the account shall be repatriated to India;
 Two way Fungibiltiy for ADR / GDRs
 Two Way fungibility of ADR / GDR issued by Indian Companies was permitted by the Government
of India & the RBI. The RBI has now, vide APDIR Circular No: 21 dated February 13th 2002, issued
operative guidelines for the 2 way fungibility of ADR / GDR.
 Earlier, once a company issues ADR / GDR, and if the holder wanted to obtain the underlying equity
shares of the Indian Company, then, such ADR / GDR would be converted into shares of the Indian
Company. Once such conversion has taken place, it was not possible to reconvert the equity shares
into ADR / GDR.
 The present rules of the RBI make such reconversion possible, to the extent of ADR / GDR which
have been converted into equity shares and sold in the local market. This would take place in the
following manner:
1. Stock Brokers in India have been authorized to purchase shares of Indian Companies for reconversion.
2. The Domestic Custodian would coordinate with the Overseas Depository and the Indian Company to
verify the quantum of reconversion which is possible and also to ensure that the sectoral cap is not
breached.
3. The Domestic Custodian would then inform the Overseas Depository to issue ADR / GDR to the
overseas Investor.
Investment outside India by Indian Companies
Pursuant to the Union Budget, outbound investment by Indian Companies has been further liberalized. The
highlights of these changes are:
 Indian Companies are now permitted to invest up to 100 Million US Dollars per financial year under the
automatic route, provided the other conditions as specified in FEMA Notification No: 19/2000 dated 3rd May
2000 are complied with. Earlier the limit for investment under the Automatic Route was 50 Million US
Dollars per financial year.
 Companies which do not have access to foreign exchange for overseas investments are permitted to purchase
foreign exchange from the Authorized Dealers up to 50% of their net worth. Earlier, the limit was 25% of
their net worth.
 These changes have been made vide FEMA Notification No: 53 dated 1st March, 2002.
Issue of Foreign Currency Convertible Bonds by Indian Companies.
Earlier, Indian Companies required approval of the Government of India before issue of Foreign Currency
Convertible Bonds (FCCBs). The RBI has vide FEMA Notification No: 55 dated March 7th2002, liberalized
these rules. Accordingly:
 Indian Companies seeking to raise FCCBs are permitted to raise them under the Automatic Route up to US 50
Million Dollars per financial year without any approval.
 The FCCBs raised shall be subject to the sectoral limits prescribed by the Government of India.
 Maturity period for the FCCBs shall be at least 5 years and the "all in cost" at least 100 basis points less than
that prescribed for External Commercial Borrowings.
New provisions for a "Status Holder"
The Export Import Policy issued by the Government of India, has created a
new class of Exporters termed as "Status Holder". A "Status Holder" has
been granted the following concessions under the FEMA Regulations:
 A Status Holder is entitled to credit 100% of his foreign exchange
earnings into the EEFC A/c. Earlier, this facility was available only to
units in the Special Economic Zones and other companies which had
obtained specific RBI approval for doing so.
 In case of exports made by a Status Holder, a time limit of 12 months has
been granted to realize the export proceeds, as against 6 months in the
case of other exporters. The time limit of 12 months was earlier available
only in case of exports made by units in the Special Economic Zones.
Other Changes
 Indian Companies can set up chairs in educational institutions abroad after obtaining
approval from the RBI – vide APDIR Circl No. 25 dated 1st March 2002.
 With the approval of the RBI, Indian Companies can credit a higher percentage of their
Foreign Exchange earnings to their EEFC A/c for the purpose of prepayment of their
External Commercial Borrowings. - vide APDIR Circl No. 26 dated 1st March 2002.
 Deposit accounts maintained by Non Residents with Indian Banks are made fully
convertible. Accordingly, NRSR A/c and NRNR A/c would cease to be effective from
1st April 2002 and the balances in them would be credited to the NRO A/c and the NRE
A/c, respectively, of the NRI. - vide APDIR Circl No. 28 dated 4th March 2002.
 Residents are permitted to take / export goods for exhibition and sale outside India without
the prior approval of the Reserve Bank of India. Now, vide APDIR Circl No. 30 dated
26th March 2002, Authorized Dealers are permitted to approve GR Forms for exhibitions
outside India, subject to the following conditions :
 Goods can be sold there locally at any price and the proceeds repatriated back to India
 Exporter can "gift" the items up to a limit of US $ 5,000 per exporter per exhibition
 Unsold items are to be imported back into India.
FEMA: FROM `REGULATING' TO
`FACILITATING' EXPORTS
BUSINESS LINE- MAY,18,2005
 Fortunately, the forex kitty has more than trebled in the last five years, giving hope
that FEMA is only set for progressive liberalization, ultimately leading to full
convertibility, though the timing for this will be set by the Reserve Bank of India
after considering various factors. But FEMA has accelerated the liberalization of
exports by "facilitating" rather than "regulating".
 The RBI withdrew from granting extensions of time or reducing the value of
realization of export proceeds, delegating these powers to banks (authorized
dealers), though subject to certain conditions. Now, banks themselves can write off
bad debt up to 10 per cent of the export proceeds due in a calendar year. With
assured documents covering payments, banks can now deal with even the caution
list exporters.
 In addition, a number of other simplifications of documents/procedures/reporting
have been made in external trade, in line with the Commerce Ministry's thrust to
promote exports.
PROGRESSIVE LIBERALIZATION MEASURES IN RESPECT OF EXPORTS PROCEEDS REALIZATIONS
S NO. A.P(DIR SERIES) DATE OF CIRCULAR CONTENTS
CIRCULAR NO.
1. 12 9/9/2000 FOLLOW UP OF OVERDUE BILS
REDUCTION IN VALUE
EXTENTION OF TIME LIMIT
WRITE OFF OF UNREALIZED EXPORT BILLS

2. 30 4/4/2001 LIBERALIZATION OF EXPORT BILLS
3. 35 11/6/2001 TIME FOR EXPORT REALIZATION RELAXED
FOR SEZ
4. 20 28/1/2002 EXTENSION OF TIME RELAXED
5. 35 1/4/2002 TIME FOR EXPORT REALIZATION RELAXED
FOR STATUS HOLDERS
6. 38 12/4/2002 REDUCTION IN VALUE
7. 61 14/12/2002 SURRENDER OF EXPORT INCENTIVES
8. 91 1/4/2003 TIME FOR EXPORT REALIZATION REMOVED
FOR SEZ
9. 22 24/9/2003 SETTLEMENT BY ECGC
10. 40 5/12/2003 LIBERALIZATION OF RELIZATION OF EXPORT
PROCEEDS FOR ALL EXPORTERS
11. 68 11/2/2004 CAUTION LISTEXPORTERS NEED PRIOR
APPROVAL FROM AD
12. 25 1/11/2004 TIME FOR EXPORT REALIZATION RELAXED
FOR EOU ETC
SOURCE:DIRECTIONS ISSUED BY RBI FROM TIME TO TIME UNDER THE FEMA
FEMA’S RECENT PROPOSALS
 Govt to allow foreign MNCs to impose annual service fee-27 Jan 2009 ET:The government is
considering a proposal to allow foreign multinationals to impose an 'annual service fee' on their Indian
subsidiary for providing management services. The foreign direct investment (FDI) policy, while allowing
payment of royalty, license fee and technical know how-how fee, does not provide for payment of annual
service fee by Indian subsidiaries.
 Fema to apply to reverse overseas M&As, says RBI –The RBI has said Indian companies merging with
overseas firms will continue to be treated as entities resident in the country under the FEMA.There is no
provision for such a merger under the current Companies Act. But a Bill to amend the Act tabled in the
Budget session of Parliament proposes to allow Indian companies to merge with overseas companies,
under section 205, a move that could introduce greater flexibility in cross-border merger and acquisitions
(M&As). The central bank has also clarified that payment by the foreign company to shareholders of listed
Indian companies being merged can be made in the form of cash, shares or Indian Depository Receipts
(IDRs) issued by the overseas companies.
In this case, RBI has clarified that Fema will have to amended suitably. Besides, IDRs in their existing
form do not have voting rights and the law has to be changed to incorporate this change. This will be
important if the merger involves allotting voting rights to Indian shareholders or some sort of management
control.
 Can stashed funds be brought back?
Residents can now freely maintain and operate foreign assets. By acquiring
or holding or owning when he was a non-resident. This follows from
Section 6 (4) of FEMA.
Is it a crime to have a Swiss bank account? Surely not. At worst, it can now
be a civil contravention and maximum tax can be charged on the
amount.The aforesaid analysis shows that the problem of stashed funds is
more of a tax problem than a problem pertaining to forex laws. Once the
government is able to obtain information, appropriate proceedings under
the tax laws and forex laws ought to be initiated, although chances of
success for government would be brighter under tax laws.
 RBI yet to give FEMA nod to new FDI rules :As per the new
guidelines, for the purpose of calculation of indirect foreign investment in
an Indian entity, a sum total of FDI, stake from non-resident Indians,
American and Global Depository Receipts, Foreign Currency Convertible
Bonds and Convertible Preference Shares will be taken into account.
With these changes, several private sector banks may find themselves
transforming their status from being 'resident entities' to the non-resident
entities. The RBI, as also the Finance Ministry, has raised issues
concerning these far-reaching changes which will throw several banks into
a different regime of governance in terms of policy clearances As these
concerns are yet to be addressed, the RBI has not notified the FDI
guidelines amended in February. "The RBI has yet to notify the new
guidelines.
THANK YOU