Chapter

INDIA

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2004
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(Position as of February 29, 2004)
Status Under IMF Articles of Agreement
Article VIIIDate of acceptance: August 20, 1994.
Exchange Arrangement
CurrencyThe currency of India is the Indian rupee.
Exchange rate structureUnitary.
Classification
Managed floating with no preannounced path for the exchange rateThe exchange rate of the rupee is determined in the interbank market. The Reserve Bank of India (RBI), which intervenes periodically in the interbank market, purchases and sells spot and forward dollars from and to authorized dealers (ADs) in the interbank market at the market exchange rate.
Exchange taxNo.
Exchange subsidyNo.
Forward exchange marketADs are allowed to deal forward in any permitted currency. The RBI may enter into swap transactions with ADs, under which it buys or sells spot dollars and sells or buys forward dollars for maturities available in the market.
A resident may enter into forward contracts with ADs to hedge against exchange risks. Effective December 9, 2003, forward contracts of importers and exporters booked and outstanding shall not exceed at any point 50% of the eligible limit (previously, 25%), provided that any amount in excess of 25% of the eligible limit shall be on a deliverable basis only. The eligible limit is defined as the last three years’ average of import/export turnover, or the previous year’s turnover, whichever is higher. A resident with an underlying contract may enter into a forward contract with an AD to the full extent of the contract.
ADs may provide forward exchange cover to foreign institutional investors (FIIs) up to the full extent of their investments in debt instruments and equities. FIIs may hedge the entire market value of their investments in equities. ADs may also provide forward cover not exceeding six months to foreign direct investors after ensuring that the investors have completed all formalities and obtained the necessary approvals for the investment in India.
Nonresident Indians (NRIs) may enter into forward contracts with ADs to hedge the amount of dividends due to them or the balances held in their foreign currency nonresident (FCNR) accounts or nonresident external (NRE) accounts. They are also eligible to have forward cover with respect to their investments in portfolio investment schemes.
Effective July 7, 2003, ADs may offer basic European forward options to customers who have genuine foreign currency exposures. All conditions applicable for booking, rolling over, and canceling forward contracts are applicable to options contracts. Only one hedge transaction can be booked against a particular exposure or part thereof for a given time period. Options contracts also cannot be used to hedge contingent or derived exposures, with the exception of exposures arising from the submission of tender bids in foreign exchange.
Residents with overseas direct investments in equities and loans may hedge against exchange risks.
Official cover of forward operationsThe Export Credit Guarantee Corporation of India, Ltd. (ECGCI) provides protection against exchange fluctuation with respect to deferred receivables from the date of a bid up to 15 years after the award of a contract. Exchange cover is offered in Australian dollars, euros, Japanese yen, pounds sterling, Swiss francs, U.A.E. dirhams, and U.S. dollars. For payments specified in other convertible currencies, cover is provided at the discretion of the ECGCI.
Arrangements for Payments and Receipts
Prescription of currency requirementsFor prescription of currency purposes, countries are divided into two groups: (1) member countries of the ACU (except Bhutan and Nepal) and (2) the external group (all other countries). For the first group, all payments for eligible current international transactions, except payments relating to travel, must be settled through the ACU arrangement. In other cases, payments may be settled in any permitted currency. Export-import transactions financed with loans from international financial institutions are settled outside the ACU mechanism. Trade settlements are made through ACU dollar accounts, which are replenished through the RBI. Payments to countries in the second group may be made in Indian rupees to the account of a resident of any of these countries or in any permitted currency, and receipts from these countries may be obtained in Indian rupees from accounts of a bank situated in any of these countries or in any permitted currency. However, special rules may apply to exports under lines of credit extended by the government of India to the governments of certain foreign countries.
Payments arrangements
Regional arrangementsIndia is a member of the ACU.
Clearing agreementsAlthough Bhutan and Nepal are members of the ACU, trade with Bhutan and Nepal is settled outside the ACU mechanism. Subject to permission from the Nepal Rastra Bank, Nepalese residents may import from India against payment in freely convertible currency, in addition to the existing system of payment in Indian rupees; such payments must be effected through the ACU mechanism. Transactions with all other ACU member countries are settled through ACU dollar accounts.
Administration of controlExchange control is administered by the RBI in accordance with the Foreign Exchange Management Act (FEMA) and the general policy established by the government, in consultation with the RBI. Much of the routine work of exchange control is delegated to ADs. Import and export licenses, where necessary, are issued by the Director General of Foreign Trade.
International security restrictions
In accordance with IMF Executive Board Decision No. 144-(52/51)Yes.
In accordance with UN sanctionsYes.
Payments arrearsNo.
Controls on trade in gold (coins and/or bullion)
Controls on domestic ownership and/or tradeThere are no restrictions on internal trade in gold. However, gold mines continue to sell gold to industrial users through the distribution network of the State Bank of India, as well as through market sales. Forward trading in gold or silver is prohibited. Apart from a few agencies authorized by the government, 13 banks are authorized by the RBI to import gold for sale in the domestic market.
Controls on external tradeThe export of personal jewelry by travelers is regulated under the Ministry of Commerce’s export and import policy baggage rules. Other rules regarding the export and import of gold are spelled out in the export and import policy.
Controls on exports and imports of banknotes
On exports
Domestic currencyIn general, the exportation of rupee notes and coins, except to Bhutan and Nepal, is prohibited. Exports of rupee notes to Bhutan or Nepal in denominations higher than Rs 100 are also prohibited. However, resident Indians may take with them Indian currency notes not exceeding Rs 5,000 a person at any one time to countries other than Bhutan and Nepal when going abroad on a temporary visit.
Foreign currencyAn authorized person (AP) may transfer abroad foreign currency acquired in the normal course of business. Any person may take out foreign exchange obtained from an AP and any unspent foreign currency owned or brought in during a previous visit. Any non-Indian resident person may take out unspent foreign exchange not exceeding the amount brought in (the amount must be declared if it exceeds the equivalent of US$5,000 in banknotes and coins or US$10,000 in banknotes, coins, and traveler’s checks).
On imports
Domestic currencyThe importation of rupee notes and coins is prohibited. However, any person may bring in rupee notes (other than notes of denominations larger than Rs 100) from Bhutan and Nepal. Indian travelers may bring in up to Rs 5,000 a person if they took out this amount when traveling abroad on a temporary visit.
Foreign currencyForeign currency notes may be brought in without limit, provided that the total amount is declared to the customs authorities upon arrival if the value of foreign notes, coins, and traveler’s checks exceeds US$10,000 or its equivalent and/or if the aggregate value of foreign currency notes brought in at any one time exceeds US$5,000 or its equivalent.
Resident Accounts
Foreign exchange accounts permittedThe accounts of Indians and of Bhutanese and Nepalese nationals residing in Bhutan and Nepal, as well as the accounts of offices and branches of Indian, Bhutanese, and Nepalese firms, companies, or other organizations in Bhutan and Nepal, are treated as resident accounts. However, residents of Nepal must obtain their foreign exchange requirements from the Nepal Rastra Bank. Approval of the RBI is required for the opening of foreign currency accounts, held both domestically or abroad, except for those covered by general permission granted by the RBI. Exporters may open exchange earners’ foreign currency (EEFC) accounts. These accounts are to be held only in non-interest bearing accounts, and no credit facility, be it funded or nonfunded, may be made available against the balances. These accounts may be used to (1) open offices abroad and meet the expenses of these offices; (2) make investments from the account balance in overseas joint ventures up to the limit of US$100 million or the equivalent without reference to the RBI; and (3) pay all trade-related expenses in foreign exchange. Individuals residing in India may open foreign currency accounts designated as resident foreign currency (RFC) accounts with foreign exchange from pensions or other payments from overseas employers or with other receipts—such as gifts or inheritances—that are permitted under the regulations. The balances held in such accounts may be used freely outside India.
Held domesticallyIndividuals are permitted to maintain resident foreign currency domestic (RFCD) accounts at a licensed bank that is also an AD. These accounts, which are non–interest bearing, may be credited with foreign exchange earned from the following sources: (1) exports of goods or services; (2) gifts or honoria while abroad; (3) legal transactions with nonresidents in India; and (4) remaining from travel abroad. As long as the foreign exchange is acquired by one of these means, there is no overall limit on the account balance. The balance may be used for any purpose permissible under current foreign exchange regulations applicable to residents. These accounts are in addition to existing RFC accounts and the permission to retain up to the equivalent of US$2,000 in foreign banknotes and/or foreign currency traveler’s checks.
Other types of accounts are permitted, but prior approval is required.
Approval requiredYes.
Held abroadThese accounts are permitted and may be used to remit up to the equivalent of US$25,000 a year for permitted current and capital transactions. Specific approval is required for remittances in excess of this limit.
Approval requiredYes.
Accounts in domestic currency held abroadn.a.
Accounts in domestic currency convertible into foreign currencyYes.
Nonresident Accounts
Foreign exchange accounts permittedFCNR accounts denominated in dollars, euros, Japanese yen, and pounds sterling may be held in the form of term deposits by persons of Indian nationality or origin. These accounts may be opened with a minimum maturity of one year and a maximum maturity of three years. Balances may be repatriated at any time without reference to the RBI. ADs are allowed to effect transfers of funds between FCNR accounts of different persons maintained with the same AD or other ADs for any purpose, subject to certain conditions. The current FCNR accounts operate in the same manner as the old FCNR accounts, except that the issuing bank (not the RBI) bears the exchange risk. Effective September 16, 2003, overseas corporate bodies (OCBs) are no longer allowed to open new FCNR accounts or to renew existing deposits; OCBs are defined as companies, partnerships, societies, or other corporate bodies at least 60% owned, directly or indirectly, by NRIs and include overseas trusts in which at least 60% of the interest of the beneficiary is irrevocably held by such persons.
Foreign embassies, missions, and diplomats are permitted to open foreign currency accounts with ADs without the approval of the RBI, subject to certain conditions. Accounts related to all foreign countries other than Bhutan and Nepal are treated as nonresident accounts.
Domestic currency accounts
Convertible into foreign currencyNonresident ordinary rupee (NOR) accounts of individuals or firms may be credited with (1) the proceeds of remittances received in any permitted currency from abroad through normal banking channels, balances sold by the account holder in any permitted currency during a visit to India, or balances transferred from rupee accounts of nonresident banks; and (2) legitimate dues paid in rupees by the account holder in India. ADs may debit NOR accounts for all local disbursements, including investments in India that are covered by RBI regulations. ADs may permit transfers abroad of current income earned within India by the account holder, once the applicable taxes have been paid. ADs may also allow remittances of up to the equivalent of US$1 million from current balances or sales of assets, subject to certain conditions and payment of applicable taxes.
Nonresident external rupee (NRER) accounts may be opened for NRIs and nonresident persons of Indian origin (PIOs). In addition to ADs holding licenses under the FEMA, some state cooperative banks, certain urban cooperative banks, and scheduled commercial banks not holding such licenses have also been permitted by the RBI to open and maintain nonresident rupee accounts, subject to certain conditions. Such accounts may also be opened for eligible persons during temporary visits to India against the tender of foreign currency traveler’s checks, notes, or coins. They may be credited with (1) new funds remitted through banking channels from any country; (2) the proceeds of foreign currency traveler’s checks, personal checks, and drafts in the name of the account holder; (3) foreign currency notes and coins tendered by the account holder while in India; (4) income from authorized investments; and (5) the transfer of funds from other NRER or FCNR accounts. ADs are allowed to transfer funds freely between NRER accounts of different persons held with the same AD or different ADs. The accounts may be debited (1) for disbursement in India and for transfers abroad; and (2) for any other transaction if covered under general or special permission granted by the RBI. Investments in shares of Indian companies, in partnership firms and the like, or in immovable property may be made, provided that such an investment or purchase is covered by FEMA regulations or that general or special permission has been granted by the RBI. Interest on deposits in NRER accounts in any bank in India is exempt from personal income tax, although juridical persons are not entitled to this exemption. Interest earnings are transferable. The balances held in such accounts by natural persons are exempt from wealth tax; gifts to close relatives in India from the balances in these accounts are exempt from gift tax.
Diplomatic missions and their personnel and family members may open rupee accounts with ADs.
NRIs and PIOs are permitted to maintain NRER accounts. Effective September 16, 2003, OCBs are no longer allowed to open new NRER accounts. Balances in such accounts are freely convertible into foreign currency. Opening such accounts in the name of Pakistan or Bangladesh nationals, even if they are of Indian origin, requires RBI approval.
Blocked accountsNo.
Imports and Import Payments
Foreign exchange budgetNo.
Financing requirements for importsn.a.
Documentation requirements for release of foreign exchange for importsEffective August 18, 2003, documentary evidence is required for foreign exchange payments for imports exceeding the equivalent of US$ 100,000 (previously, US$25,000). Further, ADs are required to notify the RBI regarding transactions exceeding US$100,000. If the amount of the transaction is less than US$1 million, the AD is permitted to accept either (1) a copy of the bill of entry for home consumption from exchange control or (2) a certificate from the chief executive officer or an auditor of the importing company stating that the goods for which payments have been made were imported into India; further, the importing company must be listed on a stock exchange in India and have a net worth of at least Rs 1 billion on the date of the last audited balance sheet or be an entity of the government of India or a public sector company.
Import licenses and other nontariff measuresImports of capital goods have been liberalized. Under the Duty Free Credit Entitlement Certificate and Export Promotion Capital Goods schemes, service providers and hotels may import duty-free 10% and 5%, respectively, of foreign exchange earned.
Positive listThe importation of the following is restricted: (1) certain specified precious, semiprecious, and other stones; (2) safety, security, and related items; (3) seeds, plants, and animals; (4) insecticides and pesticides; (5) drugs and pharmaceuticals; (6) chemicals and allied items relating to the small-scale sector; and (7) some consumer goods and certain other items.
Negative listThe importation of the following is prohibited: tallow, fat and/or oils rendered or unrendered of any animal origin, animal rennet, wild animals (including their parts and products), and ivory. Exports and imports of arms and related materials to and from Iraq are also prohibited.
Import taxes and/or tariffsOn February 13, 2003, a duty was imposed on imports of nonbrass metal flashlights from China. Effective January 9, 2004, the peak import tariff rate on nonagricultural goods was reduced to 20% from 25% and the special additional customs duty of 4% was abolished.
Effective January 28, 2004, imports of all kinds of capital goods, including office and professional equipment, are allowed under the Duty Free Entitlement Scheme.
State import monopolyThe importation of certain specified types of petroleum products, fertilizers, edible oils, seeds, and cereals is channeled through the state trading enterprises, i.e., Indian Oil Corporation Ltd., Minerals and Metals Trading Corporation of India Ltd., State Trading Corporation of India Ltd., and the Food Corporation of India.
Exports and Export Proceeds
Repatriation requirementsProceeds must be repatriated within six months of shipment unless otherwise specified by the RBI. Indian-owned warehouses abroad established with the permission of the RBI are allowed a period of up to 15 months to realize export proceeds. Exporters are required to obtain permission from an AD if the export proceeds are not realized within the prescribed period. The RBI also administers a scheme under which engineering goods (capital goods and consumer durables) may be exported under deferred credit arrangements, so that the full export value is paid in installments over more than six months. Exporters of certain bulk items, exports to Latin American countries, and status holder exporters may realize export proceeds within 365 days from the date of shipment.
Surrender requirementsExporters are permitted to retain up to 50% of foreign exchange receipts in foreign currency accounts with banks in India. In the case of 100% export-oriented businesses, those in export-processing zones, and those in hardware/software technology parks, up to 70% of foreign exchange receipts may be retained. Corporate exporters are permitted to extend trade-related advances to their importer clients out of their EEFC accounts without obtaining RBI approval. ADs are permitted to allow utilization of funds held in EEFC accounts for making payments for current and capital transactions that are permissible under FEMA regulations.
Financing requirementsn.a.
Documentation requirementsn.a.
Export licensesLicenses are required for exports of a few goods, e.g., mineral ores (iron, chrome, and manganese), chemicals under the Montreal Protocol on the substances that are depleting the ozone layer, agricultural items (certain seeds, sandalwood, chips of specified variety and sizes, value-added products of red sandalwood, fodder, and chemical fertilizer) and biological material such as human blood samples. Licenses are also required for exports of goods that are covered by international treaty obligations regarding security and the environment. Effective January 28, 2004, the ceiling on the export of gifts abroad is Rs 500,000 a year (previously, Rs 100,000 a year).
Export taxes
Other export taxesYes.
Payments for Invisible Transactions and Current Transfers
Controls on these transfersResidents may obtain foreign exchange for bona fide current account transactions with some exceptions, such as 100 items related to public sector expenses and other items listed in this section.
Investment-related paymentsRemittances are allowed, subject to certain conditions, provided that all current taxes and other liabilities have been cleared.
The RBI allows branches of foreign companies operating in India to remit profits to their head offices without the prior approval of the RBI. Foreign banks do not need RBI approval for remittances of profits (net of taxes) earned in the normal course of business with their head offices. Remittances are subject to compliance with the Banking Act and RBI directives.
Indicative limits/bona fide testYes.
Payments for travel
Quantitative limitsThe limits are the equivalent of US$10,000 a year and US$25,000 a trip for personal and business travel, respectively, regardless of the period of stay. Travel-related expenses exceeding the limits require RBI approval. No such limits apply on payments made with an international credit card (ICC). Unused amounts up to the equivalent of US$2,000 may be retained indefinitely. Any additional amounts must be surrendered or credited to the person’s RFCD account within 90 or 180 days for cash and traveler’s checks, respectively. Foreign exchange is not made available for travel to Bhutan or Nepal or for transactions with residents of these countries.
Indicative limits/bona fide testADs may release foreign exchange in certain cases beyond indicative limits.
Personal payments
Quantitative limitsThirteen types of personal expenses are subject to limits, and amounts exceeding these limits require RBI approval.
ADs have the power to release foreign exchange for overseas medical costs, subject to documentary requirements. Effective July 17, 2003, ADs may remit abroad up the equivalent of US$100,000 a year for various purposes, such as employment abroad, emigration, maintenance of close relatives abroad (previously, the limit on these transfers was US$5,000 a year), or education abroad (previously, the limit on these transfers was based on cost estimates from the university or institution abroad), and students may transfer up to US$1 million from personal accounts maintained with an AD.
ADs may allow remittances of up to the equivalent of US$1 million a year for any purpose, subject to payment of appropriate taxes. Further, if the funds are the proceeds from the sale of immovable property, the property must have been owned for at least 10 years.
Effective July 17, 2003, ADs may effect remittances of up to US$1 million a project toward consultancy services procured abroad, subject to documentary requirements.
Foreign workers’ wages
Quantitative limitsForeign workers are permitted to remit their entire net salaries to their own countries to pay insurance premiums, to support their families, and for other expenses, subject to the pays ment of applicable taxes.
Indicative limits/bona fide testYes.
Credit card use abroadPersons going abroad for any purpose (except for employment or emigration) may use ICCs for all purposes, including for the purchase of articles for personal use, subject to the limits established by the card provider. The basic travel quota may also be obtained through the use of credit cards. The use of ICCs is allowed for imports of books, computer software, and other items through the Internet, with the exception of prohibited items, such as lottery tickets, sweepstakes participation, banned or prohibited subscriptions, and payments for call-back services. Debit cards may be used for any purpose for which foreign exchange may be purchased from an AD.
Other payments
Quantitative limitsYes.
Indicative limits/bona fide testYes.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsProceeds must be repatriated.
Surrender requirementsUp to 50% of receipts may be retained in foreign currency accounts with banks in India. In the case of export-oriented units and units created in export-processing zones, software technology parks, or electronic maintenance technology parks, 100% of receipts may be retained in these accounts.
Restrictions on use of fundsn.a.
Capital Transactions
Controls on capital transactionsYes.
Controls on capital and money market instruments
On capital market securities
Shares or other securities of a participating nature
Purchase locally by nonresidentsFIIs are permitted to make investments in all securities traded on the primary and secondary markets, including equities and other securities, and in instruments of companies listed or to be listed on the stock exchanges in India. FIIs are also allowed to invest in dated government securities, either on behalf of clients or by using proprietary funds. FIIs are required to register with the Securities and Exchange Board of India (SEBI). For FIIs registered for investments in equities, investments in equity and debt instruments must be in a ratio of 70% to 30%. However, FIIs’ sub-accounts may set up separately 100% debt funds that may invest their portfolio in debt instruments within the overall approved debt ceiling.
Portfolio investments in the primary or secondary markets are subject to a ceiling of 10% of the issued share capital for individual FII holdings and 24% (this ceiling may be raised to sectoral ceilings as applicable, provided the general meeting of the company passes a special resolution) of issued share capital for the total holdings of all registered FIIs in any one company, with the exception of (1) foreign investments under financial collaboration; and (2) investments through offshore single and regional funds, global depository receipts (GDRs), and convertibles in the euromarket. Nonresidents may not make portfolio investments in companies engaged in print media.
Under the portfolio investment scheme, the individual ceiling for NRIs and PIOs is 5% of the paid-up capital, and their aggregate investment ceilings are 10% of the paid-up share capital of a company. In the case of companies listed on the stock exchange, the ceiling may be raised to 24% of paid-up capital by the passage of a special resolution at the general meeting. Effective September 16, 2003, OCBs are prohibited from making any new purchases under the scheme.
Sale or issue locally by nonresidentsEffective January 27, 2003, Sri Lankan companies are allowed to issue securities in India (with the signing of an economic cooperation agreement between India and Sri Lanka). Payments and subscriptions for these are effected through Indian depository receipts. Previously, nonresidents were not permitted to issue securities in the local market. In the case of securities of Indian companies held by nonresidents, transfers to a resident, other than by sale on the stock exchange, require RBI permission. Transfers of sale proceeds are permitted, subject to tax, provided no controls were imposed on the repatriation of sale proceeds while approving the original investment. Transfers between two nonresidents do not require permission from the RBI, except where the recipient has a financial or technical collaboration in the same or a related field as the company whose shares are being transferred. Transfers from NRIs and PIOs to nonresidents other than NRIs and PIOs require RBI approval.
Purchase abroad by residentsRBI permission is required for acquiring, holding, or disposing of any foreign security. In the case of a sale of foreign securities, the repatriation of sale proceeds to India is required, unless otherwise specified. General permission has been granted by the RBI to residents to hold, own, transfer, or invest in foreign currency or foreign securities outside India if the currency or security was acquired or held by the person while residing outside India, was received through an inheritance or as a gift from a person who was residing outside India, or was acquired during the prezero period (i.e., prior to July 8, 1947). ADs are authorized to approve remittances by resident employees of foreign companies and their joint ventures or wholly owned subsidiaries, in which the foreign company holds not less than 51% equity for acquisitions of shares of the foreign company under an employee stock option scheme, subject to certain conditions. Similarly, applications are considered from employees of Indian software companies for remittances of the equivalent of US$10,000 in a five-year period for acquiring shares in overseas joint ventures or wholly owned subsidiaries of Indian companies, subject to certain conditions. The RBI also permits employees of Indian software companies to purchase foreign securities under the American depository receipt (ADR) and GDR linked stock option schemes, provided that the consideration for purchase does not exceed the equivalent of US$50,000 in a five-year period.
Effective February 4, 2004, residents were allowed to purchase these instruments up to the equivalent of US$25,000 without RBI approval, under the Liberalized Remittance Scheme.
Sale or issue abroad by residentsThe regulations governing purchases abroad by residents apply.
Bonds or other debt securities
Sale or issue locally by nonresidentsCertain restrictions apply on Indian depository receipts.
Purchase abroad by residentsYes.
Sale or issue abroad by residentsConvertible bonds in foreign currency may be issued up to the equivalent of US$50 million a fiscal year through the automatic route without RBI approval.
On money market instruments
Purchase locally by nonresidentsNRIs are allowed to invest in money market mutual funds floated by commercial banks and public or private sector financial institutions with authorization from the SEBI on a nonrepatriation basis.
Sale or issue locally by nonresidentsThese transactions require RBI approval.
Purchase abroad by residentsEffective February 4, 2004, residents were allowed to purchase these instruments up to the equivalent of US$25,000 without RBI approval, under the Liberalized Remittance Scheme.
Sale or issue abroad by residentsThese transactions are not permitted.
On collective investment securitiesResident companies require general or specific permission from the RBI to issue securities to NRIs.
Purchase locally by nonresidentsThese transactions, when made by FIIs, do not require the prior approval of the RBI.
Sale or issue locally by nonresidentsThe issuing of collective investment securities by nonresidents on local markets in India is permitted subject to certain conditions.
Purchase abroad by residentsResident individuals and companies may make equity investments in companies listed abroad on recognized stock exchanges that have at least a 10% holding in an Indian company listed on a recognized stock exchange in India. Resident companies may not invest more than 25% of their net assets in this way.
Effective January 13, 2003, mutual funds in India may also make investments in the same set of companies listed abroad up to a cap of US$1 billion (previously, US$500 million), subject to approval from the SEBI.
Sale or issue abroad by residentsYes.
Controls on derivatives and other instruments
Purchase locally by nonresidentsADs may offer forward contracts to nonresidents outside India to hedge on investments that were made in India after January 1, 1993. FIIs may hedge the market value of their entire investment in equity or debt. NRIs may hedge the dividend due to them, balances held in FCNR and NRE accounts, and portfolio investments.
Effective September 1, 2003, FIIs and NRIs may trade in all exchange-traded derivative contracts, including interest rate derivatives, approved by the SEBI, subject to prescribed limits. While FIIs can trade in derivatives with repatriation benefits, NRIs may also invest in these contracts using rupee funds held in India on a nonrepatriable basis, subject to the limits prescribed by the SEBI.
Sale or issue locally by nonresidentsThese transactions are not allowed.
Purchase abroad by residentsADs are allowed to purchase hedge instruments for corporate clients and for their own asset/liability management. Exporters and importers are also allowed to hedge price exposures on commodities for this purpose.
Sale or issue abroad by residentsThese transactions require the permission of the RBI.
Controls on credit operationsAll corporations except banks, nonbank finance companies, and other financial institutions are eligible to undertake external borrowing.
Commercial credits
By residents to nonresidentsA commercial credit of up to six months is allowed for exports on documents-against-acceptance terms. Contracts for exports involving payments to be realized beyond the normal period of six months are treated as deferred payment exports. Such exports are permitted, depending on the credit terms offered, the commodity to be exported, and other related considerations. This applies for turnkey, construction, and service contracts undertaken by Indian exporters on credit terms. Under the Buyer’s Credit Scheme, the Export-Import Bank (EXIM Bank) offers credits to foreign buyers in connection with the export of capital goods and turnkey projects in India in participation with commercial banks in India. The EXIM Bank considers the creditworthiness, standing, and financial position of the overseas borrower; the economic viability of the project; the standing of the Indian exporter; etc. An Indian exporter may lend without restriction from the funds held in an EEFC account for trade-related purposes to an overseas importing customer against a bank guarantee.
Other transactions require prior permission from the RBI.
To residents from nonresidentsTrade credits of up to one year for noncapital goods and up to three years for capital goods are freely available up to $20 million a transaction without RBI approval. Trade credits (buyer’s credits, supplier credits, or lines of firm or company credit) for imports of goods and services for a period of less than three years are considered by the RBI on terms and conditions relative to terms offered in overseas markets.
Financial creditsAn Indian entity may lend in foreign exchange to its wholly owned subsidiary abroad.
By residents to nonresidentsYes.
To residents from nonresidentsEffective March 1, 2003, prepayments of loans to residents from nonresidents through ADs are permitted without any limit (previously, the limit was the equivalent of US$100 million) under the automatic route. Effective February 1, 2004, all eligible legal entities (except banks, financial institutions, housing finance companies, and nonbank financial companies (NBFCs) may borrow abroad up to the equivalent of US$20 million for loans of three to five years of average maturity and up to US$500 million for loans of more than five years’ average maturity under the automatic route without RBI approval. The automatic route is available to borrowers who have complied with all relevant government and RBI acts, guidelines, and regulations while accessing external borrowing. Previously, all such borrowing was subject to a US$50 million ceiling and, effective November 14, 2003, borrowing in excess of this amount was permitted only for financing equipment imports and infrastructure projects. Also, effective February 1, 2004, borrowing with an average maturity of three to five years is subject to a maximum spread of 200 basis points over the six-month LIBOR of the currency in which the loans are raised or the applicable benchmarks), and borrowing with more than five years of average maturity is subject to a maximum spread of 350 basis points. Previously, all borrowing was subject to maximum spreads over six-month LIBOR (150 basis points for normal projects, 250 basis points for infrastructure projects, and 300 basis points for other long-term projects).
Guarantees, sureties, and financial backup facilities
By residents to nonresidentsADs are allowed to give performance bonds or guarantees in favor of overseas buyers in connection with bona fide exports from India, as well as guarantees in the ordinary course of business with respect to missing documents, authenticity of signatures, and for other similar purposes. The RBI has granted general permission to agents of foreign shipping and airline companies to give guarantees on behalf of their companies with respect to any debt or other obligation—such as income tax, customs, or postage—to any central or state government agency in India.
ADs, financial institutions, and NBFCs are not permitted to issue a guarantee standby letter of credit, or a letter of credit on behalf of their constituents, to access commercial borrowings or financial credit. Further, ADs are not permitted to issue the same instruments for trade credit in favor of an overseas lender on behalf of their importer constituents.
To residents from nonresidentsThe RBI has permitted ADs to grant loans to residents against guarantees from nonresidents, subject, among other things, to the condition that no direct or indirect payment is made abroad by way of guarantee, commission, or otherwise.
Controls on direct investment
Outward direct investmentEffective January 13, 2004, Indian companies acquiring foreign companies or investing directly abroad in joint ventures or wholly owned subsidiaries may invest up to 100% (previously, 50%) of their net worth within an overall limit of US$100 million or the equivalent in one financial year through the automatic route. Companies seeking to invest in financial sector activities abroad must also obtain approval from the regulatory authorities in India and abroad. For the purpose of investing abroad, Indian companies may purchase foreign exchange up to 100% of their net worth as of the date of their last audited balance sheet. Companies may invest 100% of the proceeds of their ADR and GDR issues for acquisition of foreign companies and direct investment in joint ventures and wholly owned subsidiaries. Companies may also invest by way of share swap transactions, subject to prior approval by the Foreign Investment Promotion Board (FIPB). This route is not available for investments in Pakistan. With respect to rupee investments in Bhutan and Nepal under the automatic route, the annual limit is equivalent to net worth.
Indian corporations and partnership firms may invest in agricultural activity abroad (including purchase of land directly, rather than through a joint-venture or wholly owned subsidiary) within the limit for investment under the automatic route.
Any Indian company that has issued ADRs or GDRs may acquire shares of foreign companies engaged in the same area of core activity up to the equivalent of US$100 million or 10 times their annual exports, whichever is higher.
Resident employees of foreign companies and their joint ventures that are wholly owned subsidiaries in which the foreign company holds not less than 51% equity may invest under an employee stock option plan without limit, subject to certain conditions.
Effective December 12, 2003, local companies making direct investments abroad may hedge the exchange rate risk in the local market by purchasing forward or options contracts from banks against proof of the exposures.
Inward direct investmentIndian companies may issue up to 100% of their stock to nonresidents under the automatic route in most sectors, except for a few that require the approval of the FIPB and for another seven areas, where less than 100% is allowed (private sector banks; insurance, telecommunications, and nonretail trading companies, companies that mine coal for captive consumption, diamonds and other precious stones, and airports). There are other exclusions, such as industrial licensing and locational policies. Foreign investment is not permitted in retail trade, atomic energy, lotteries, gambling and other betting, housing and real estate, and agriculture (excluding floriculture, horticulture, seed development, animal husbandry, and agro- and allied sector-related services) and plantations (excluding tea).
Effective September 16, 2003, OCBs that are unincorporated entities are not allowed to make new investments under the Foreign Direct Investment Scheme, including through the automatic route.
Foreign direct investment in nonretail trading companies requires registration with the Ministry of Commerce and Industry and acquisition of a certificate on a trading company’s status as an export, trading, star trading, or super-star trading house before applying to the RBI for remittances or dividends. The automatic route permits foreign investment of up to 51% of the paid-in capital of such Indian companies.
Foreign investment in print media requires registration with the Ministry of Information and Broadcasting and is subject to the following restrictions: (1) foreign investment in companies engaged in the publication of news or current affairs may not exceed 26% and must be in the form of foreign direct investment; and (2) foreign investment in other print media may not exceed 74% of the paid-up capital of the company, including all foreign direct and indirect investment, NRI and PIO investment, and investment on a repatriation or nonrepatriation basis.
Foreign direct investment in the insurance sector requires a license from the Insurance Regulatory and Development Authority.
Applications for investment in areas that do not fall within the automatic route but that are covered by the foreign investment policy require FIPB approval. Such investments may be approved in accordance with the sector-specific guidelines and sectoral equity ceilings. The Department of Industrial Policy and Promotion of the Ministry of Commerce and Industry is the relevant agency for all issues related to foreign direct investment, including approvals. General permission has also been granted to SEBI-registered foreign venture capital investors to invest in an Indian venture capital undertaking or a venture capital fund.
NRIs may use funds derived from new remittances or held in their NRE or FCNR accounts to (1) make portfolio investments with repatriation benefits of up to 5% of the capital, provided that the total holdings of shares and convertible debentures held on either a repatriable or nonrepatriable basis by all nonresident investors do not exceed 10% (extendable to 24% if the general meeting of the investing company passes a special resolution) of the paid-in capital of the company or of the total paid-in value of each series of convertible debentures issued by the company; (2) invest freely in national savings certificates with full repatriation benefits. Existing joint-venture companies may raise the ratio of foreign equity shares to prescribed percentages of their capital through expansion of their capital base or through preferential allocation of shares to the foreign investor; and (3) invest on a nonrepatriable basis in money market mutual funds (OCBs only), subject to RBI approval.
Controls on liquidation of direct investmentShares may be sold freely on the stock exchange; however, other sales of shares, securities, or immovable property require approval of the RBI. Repatriation of after-tax sales proceeds is generally permitted, provided no condition of nonrepatriation was imposed when the original investment was approved.
Controls on real estate transactionsThese transactions require the permission of the RBI.
Purchase abroad by residentsA person resident in India may hold, own, or transfer immovable property outside India, provided that such property was acquired while the person resided outside India or was obtained through an inheritance or as a gift. That person is also free to dispose of such property or acquire new property from the sale proceeds of such property. Residents may buy immovable property abroad using RFC accounts.
Effective February 4, 2004, residents may acquire property abroad using a personal remittance up to the equivalent of US$25,000. RBI approval is required for Indian companies that have established offices abroad to acquire immovable property abroad for their business use and for staff residences.
Purchase locally by nonresidentsNRIs may invest in companies engaged in real estate development (e.g., construction of houses).
Sale locally by nonresidentsRepatriation of after-tax sales proceeds is permitted up to the amount brought in to purchase the property. ADs may allow remittances of up to the equivalent of US$1 million a year—subject to the payment of applicable taxes—for sales of immovable property. Prior to sale, the property must have been held for 10 years.
Controls on personal capital transactions
Loans
By residents to nonresidentsADs may lend to NRIs in rupees to purchase immovable property, shares for personal business, or mortgages. Borrowing not exceeding US$250,000 or its equivalent by residents from nonresident close relatives is permitted by the RBI provided the loan is interest-free and is repayable in one year or less.
To residents from nonresidentsNRIs are permitted to grant loans on a nonrepatriation basis to residents for a period not exceeding three years and with an interest rate not exceeding the bank rate by more than 2%.
Gifts, endowments, inheritances, and legacies
By residents to nonresidentsADs are allowed to permit remittances of gifts and donations up to the equivalent of US$5,000 a year by residents. Requests for higher amounts are considered by the RBI on a nonrepatriation basis.
Transfer of assets
Transfer abroad by emigrantsYes.
Transfer of gambling and prize earningsRemittances of earnings from sweepstakes, betting, and lotteries are not permitted.
Provisions specific to commercial banks and other credit institutions
Borrowing abroadBorrowing is subject to the policy on external commercial borrowing formed by the RBI in consultation with the MOF. ADs may avail themselves of loans, overdrafts, and other types of fund-based credit facilities from their overseas branches and correspondents of up to 25% of their unimpaired Tier I capital or the equivalent of US$10 million, whichever is higher.
Maintenance of accounts abroadThere are no controls on ADs maintaining accounts abroad.
Lending to nonresidents (financial or commercial credits)ADs are free to manage surplus balances in their exchange accounts through overnight placement and investments with their branches or correspondent banks, subject to limits imposed by their respective boards.
Lending locally in foreign exchangeBanks may lend to residents to meet foreign exchange requirements toward preshipment credit in foreign currency for financing domestic inputs. Banks may also use their FCNR deposit resources to grant loans to residents.
Purchase of locally issued securities denominated in foreign exchangeNo scheme is in place with respect to these transactions.
Differential treatment of deposit accounts in foreign exchange
Reserve requirementsAll rupee and foreign currency deposits are subject to a cash reserve ratio of 4.75% of net demand and time deposit liabilities; ACU funds in U.S. dollars, however, are subject to a minimum ratio of 3% of net demand and time deposit liabilities.
Interest rate controlsInterest rates on FCNR (bank) deposits are subject to a ceiling of LIBOR or the swap rate for the corresponding maturity less 25 basis points, except in the case of yen deposits.
Differential treatment of deposit accounts held by nonresidents
Reserve requirementsAll nonresident deposits, in both local and foreign currency, are subject to the same cash reserve requirements and statutory liquidity ratios.
Interest rate controlsThe interest rates on NRER deposits with maturities of one to three years opened after April 17, 2004, are subject to a ceiling of LIBOR/swap rates for U.S. dollars of the same maturity. Banks may offer differential interest rates on wholesale rupee deposits equal to or exceeding Rs 1.5 million. The interest rates on NRE savings deposits are subject to a ceiling of LIBOR/swap rates for six-month maturity on U.S. dollar deposits.
Investment regulations
Abroad by banksBanks may invest in money market instruments and/or debt instruments held abroad up to the limits approved by their board of directors.
Open foreign exchange position limitsBanks are required to maintain on an ongoing basis Tier I and Tier II capital at 9% of the open position limit approved by the RBI.
Provisions specific to institutional investors
Limits (max.) on investment portfolio held abroadYes.
Other controls imposed by securities lawsn.a.
Changes During 2003
Exchange arrangementJuly 7. ADs were allowed to offer basic European forward options to customers who have genuine foreign currency exposures.
December 9. The eligible limit for forward contracts of importers and exporters booked and outstanding was raised to 50% of the previous year’s turnover or the last three years’ average of import/export turnover, whichever is higher (previously, 25%), provided that any amount in excess of 25% shall be on a deliverable basis only.
Nonresident accountsSeptember 16. OCBs were no longer allowed to open new FCNR or NRER accounts, or to renew deposits already made.
Imports and import paymentsFebruary 13. A duty was imposed on imports of nonbrass metal flashlights from China.
August 18. The limit for which documentary evidence is required for foreign exchange payments for imports was increased to the equivalent of US$100,000 from US$25,000. Further, Ads were required to notify the RBI regarding transactions exceeding US$100,000.
Payments for invisible transactionsand current transfersJuly 17. ADs were allowed to remit abroad up to the equivalent of US$100,000 for various purposes, such as employment abroad, emigration, maintenance of close relatives abroad (previously, the limit on these transfers was US$5,000 a year), or education abroad (previously, the limit on these transfers was based on cost estimates from the university or institution abroad), and students were allowed to transfer up to US$1 million from personal accounts maintained with an AD.
July 17. ADs were allowed to effect remittances of up to US$1 million a project toward consultancy services procured abroad, subject to documentary requirements.
Capital transactions
Controls on capital and money market instrumentsJanuary 13. The limit on investments made by mutual funds in India in companies listed abroad was raised to US$1 billion from US$500 million.
January 27. Sri Lankan companies were allowed to issue securities in India. Payments and subscriptions for these are effected through Indian depository receipts.
September 16. OCBs were no longer allowed to purchase securities under the portfolio investment scheme.
Controls on derivatives and other instrumentsSeptember 1. FIIs and NRIs were allowed to trade in all exchange-traded derivative contracts, including interest rate derivatives, approved by the SEBI, subject to prescribed limits.
Controls on credit operationsMarch 1. Prepayments of loans to residents from nonresidents through ADs were permitted without any limit (previously, the limit was up to the equivalent of US$100 million) under the automatic route.
November 14. External borrowing in excess of the equivalent of US$50 million was permitted only for financing equipment imports and infrastructure projects. All borrowing was subject to maximum spreads over six-month LIBOR (150 basis points for normal projects, 250 basis points for infrastructure projects, and 300 basis points for other long-term projects).
Controls on direct investmentSeptember 16. OCBs that are unincorporated entities were not allowed to make new investments under the Foreign Direct Investment Scheme, including through the automatic route.
December 12. Local companies making direct investments abroad were allowed to hedge the exchange rate risk in the local market by purchasing forward or options contracts from banks against proof of the exposures.
Changes During 2004
Imports and import paymentsJanuary 9. The peak import tariff rate on nonagricultural goods was reduced to 20% from 25% and the special additional customs duty of 4% was abolished.
January 28. Imports of all kinds of capital goods, including office and professional equipment, were allowed under the Duty Free Entitlements Scheme.
Exports and export proceedsJanuary 28. The ceiling on the export of gifts abroad was raised to Rs 500,000 a year from Rs 100,000 a year.
Capital transactions
Controls on capital and money market instrumentsFebruary 4. Under the Liberalized Remittance Scheme, residents were allowed to purchase abroad capital and money market instruments up to the equivalent of US$25,000 without RBI approval.
Controls on credit operationsFebruary 1. The ceiling on borrowing through the automatic route was changed to the equivalent of US$20 million for loans of three or five years of average maturity and to US$500 million for loans of more than five years’ average maturity. Previously, all such borrowing was subject to a US$50 million ceiling.
February 1. Borrowing with an average maturity of three or five years was made subject to a maximum spread of 200 basis points over the six-month LIBOR of the currency in which the loans are being raised or the applicable benchmark(s). Borrowing with more than five years of average maturity was made subject to a maximum spread of 350 basis points.
Previously, all borrowing was subject to maximum spreads over six-month LIBOR (150 basis points for normal projects, 250 basis points for infrastructure projects, and 300 basis points for other long-term projects).
Controls on direct investmentJanuary 13. Indian companies acquiring foreign companies or investing directly in joint ventures or wholly owned subsidiaries may invest up to 100% (previously, 50%) of their net worth within an overall limit of US$100 million or the equivalent in one financial year through the automatic route.
Controls on real estate transactionsFebruary 4. Residents were allowed to acquire property abroad using a personal remittance up to the equivalent of US$25,000.

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