Annual Report on Exchange Arrangements and Exchange Restrictions 2005
Chapter

INDIA

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2005
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(Position as of March 31, 2005)

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 pre-determined 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 U.S. dollars from and to 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 U.S. 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. Forward contracts of importers and exporters booked and outstanding must not exceed at any point in time 100% of the eligible limit, provided that any amount in excess of 25% of the eligible limit shall be only on a deliverable basis. The eligible limit is defined as the last three years’ average of import or 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 in India to hedge exposure to exchange risk to the full extent of such a 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 to hedge their currency risk arising from proposed direct investments in India after ensuring that the foreign entity involved has completed all formalities and obtained the necessary approvals (where applicable) for the investment in India.
Nonresident Indians (NRIs) may enter into forward contracts with ADs to hedge the amount of dividends due 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.
ADs may offer plain vanilla 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 arising from such investments.
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) of 1999 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, 14 banks are authorized by the RBI to import gold for sale in the domestic market.
Controls on external tradeThere are no restrictions on the export of gold from the country. A few nominated agencies, banks approved by the RBI, 100% export-oriented units, and units in special economic zones that are in the gem and jewelry business are permitted to directly import gold. Nonresident Indians entering India are also permitted to bring in gold bars and coins in accordance with applicable rules. Other guidelines regarding the export and import of gold are governed by the Foreign Trade Policy of the government of India.
Controls on exports and imports of banknotes
On exports
Domestic currencyIn general, the export 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 going abroad on a temporary visit may take with them Indian currency notes not exceeding Rs 5,000 a person to countries other than Bhutan and Nepal.
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 for a permissible transactions. Nonresidents may take out unspent foreign exchange up to the aggregate value of foreign exchange declared on the customs declaration form at the time of arrival.
On imports
Domestic currencyThe importation of rupee notes and coins is prohibited. However, a person may bring in rupee notes (other than notes of denominations larger than Rs 100) from Bhutan and Nepal. A person returning from a temporary visit from places other Bhutan and Nepal may bring in up to Rs 5,000 a person if they took out this amount on their departure from India.
Foreign currencyForeign exchange 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 permittedApproval 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. Exchange earners 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 for all bona fide transactions. Effective June 7, 2004, EEFC account balances may be used for trade-related loans to overseas importers. Returning resident individuals 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. Effective July 20, 2004, proceeds of life insurance claims may be credited to RFC accounts. The balances held in such accounts may be used freely outside India.
Held domesticallyResident individuals are permitted to maintain resident foreign currency domestic (RFCD) accounts with an AD. These accounts, which are non–interest bearing, may be credited with foreign exchange from the following sources: (1) exports of goods or services; (2) gifts or honoria while abroad; (3) legal transactions with nonresidents in India; (4) remaining balances from travel abroad; and (5) effective July 20, 2004, proceeds of life insurance claims settled in foreign currency. 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.
Held abroadResident individuals may open and maintain foreign currency accounts abroad, which 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 and for other transactions.
Accounts in domestic currency held abroadn.a.
Accounts in domestic currency convertible into foreign currencyNo.
Nonresident Accounts
Foreign exchange accounts permittedFCNR accounts denominated in U.S. dollars, euros, Japanese yen, and pounds sterling may be opened and held by persons of Indian nationality or origin. These accounts may be opened only in the form of term deposits 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. 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. NRIs located in Nepal or Bhutan may also open such accounts provided they are funded with permitted foreign exchange.
Domestic currency accounts
Convertible into foreign currencyDiplomatic missions and their personnel and family members may open rupee accounts with ADs.
NRIs and nonresident persons of India origin (PIOs) are permitted to maintain nonresident external rupee (NRER) accounts. Overseas corporate bodies (OCBs) are not 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 February 6, 2004, 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 the nonsubmission of evidence for imports valued at US$100,000 or higher. If the amount of the transaction is less than US$1 million, ADs are 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, where the importing company is listed on a stock exchange in India and has a net worth of at least Rs 1 billion on the date of the last audited balance sheet, an entity of the government of India or a public sector company or entity whose accounts are audited by the Comptroller and Auditor General of India.
Import licenses and other nontariff measuresImports of capital goods have been liberalized. Under the Duty Free Credit Entitlement Certificate, service providers and hotels may import duty free 10% and 5%, respectively, of foreign exchange earned. Under the Export Promotion Capital Goods Scheme, effective August 31, 2004, (1) imports of secondhand capital goods are permitted without restriction on age; (2) imports of capital goods utilized for the export of agricultural products are permitted at zero duty rates; (3) transfers of capital goods to groups of companies and managed hotels are permitted; and (4) installation certificates are no longer required for movable capital goods in the service sector.
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. Imports from Iraq are also prohibited, except with the prior approval of the relevant Security Council committee.
Import taxes and/or tariffsEffective March 1, 2005, the peak import tariff rate on nonagricultural goods is 15% (previously, 20%), with a few exceptions. The ad valorem component of the import duty on textiles, fabrics, and garments is reduced to 15% (previously, 20%). Effective March 1, 2005, import duties are as follows: (1) primary and semi-finished forms of (a) stainless steel, other alloy steel, and ferro-alloys; (b) aluminum; (c) copper; (d) zinc; (e) tin; (f) base metals (such as tungsten, magnesium, cobalt, titanium, etc.), 10% (previously, 15%); (2) lead, 5% (previously, 15%); (3) inputs for the manufacture of steel such as refractories, raw materials for refractories, and graphite electrodes, 10% (previously, 15%); (4) certain polymers, 10% (previously, 15%); (5) certain other chemicals, 5% (previously, 10%); (6) crude petroleum, 5% (previously, 10%); (7) motor spirit (petrol) and high speed diesel, 10% (previously, 15%); and (8) passenger baggage, 35% (previously, 40%). On 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 lifted. Effective January 28, 2004, imports of all kinds of capital goods, including office and professional equipment, are allowed under the Duty Free Entitlement Scheme. A duty applies on imports of nonbrass metal flashlights from China. On July 9, 2004, import duties were changed as follows: (1) nonalloy steel, 10% (previously, 15%); (2) alloy steel, copper, lead, zinc, and base metal, peak rate of 15% (previously, 20%); (3) refractory raw materials, mineral products, and catalysts, 15% (previously, 20%); and (4) refined palm oil, 75% (previously, 70%). Effective August 20, 2004, the import duty on primary and semi-finished nonalloy steel is reduced to 5% from 10%.
State import monopolyThe importation of certain specified types of wheat and meslin, soybean, fertilizers, and palm oils is channeled through agencies such as the Minerals and Metals Trading Corporation of India Ltd., State Trading Corporation of India Ltd., the Food Corporation of India, and the Hindustan Vegetable Oil Corporation.
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 for 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. Status holder exporters, 100% export oriented units, and units in electronic hardware technology parks, software technology parks, and bio-technology parks may realize export proceeds within 12 months 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 status-holder exporters and 100% export-oriented businesses, those in export-processing zones, those in hardware/software technology parks, and specified professionals, up to 12 months 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 requirementsEffective January 31, 2004, the declaration of exports of goods and software in amounts up to US$25,000 is waived.
Export licensesLicenses are required for exports of a few goods, e.g., mineral ores and concentrates and chemicals. Licenses are also required for exports of goods that are covered by international treaty obligations regarding security and the environment. Effective February 20, 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 taxesExport duties apply as follows: (1) snake skin, raw fur lamb skins, 10%; (2) tanned leather, cycle saddle leathers, hydraulic/packing, belting/washer leathers, picking band leathers, strap/combing leathers, 15%; (3) leather for luggage, cases, handbags, 25%; (4) other hides, skins, and leathers, tanned and untanned, excluding manufactures, 60%.
Payments for Invisible Transactions and Current Transfers
Controls on these transfersResidents may obtain foreign exchange for bona fide permissible current account transactions.
Investment-related paymentsRemittances are allowed, subject to certain conditions, provided that all current taxes and other liabilities have been cleared. Branches of foreign companies operating in India can remit profits to their head offices without the prior approval of the RBI subject to payment of applicable tax and other liabilities.
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. No such limits apply on payments made with an international credit card (ICC). 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 beyond indicative limits, where applicable, upon verification of purpose.
Personal payments
Quantitative limitsThirteen types of personal expenses are subject to limits, and amounts exceeding these limits require RBI approval.
ADs are authorized to release foreign exchange for medical costs, on the basis of declarations without supporting documents. 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, or education abroad. Higher amounts can be permitted by ADs on the basis of documented estimates. Students, like other NRIs, may transfer up to US$1 million from personal accounts maintained with an AD.
ADs may allow nonresidents to remit 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.
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 payment of applicable taxes.
Indicative limits/bona fide testYes.
Credit card use abroadPersons going abroad 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 proscribed subscriptions, and payments for call-back services. Debit and ATM cards may be used for any purpose for which foreign exchange may be purchased from an AD.
Other paymentsEffective February 24, 2004, residents are allowed to remit without prior RBI approval: health insurance premiums, commissions on sales of property, proceeds of short-term credit to overseas offices of Indian banks, foreign television advertising fees, royalties, and franchise fees.
Quantitative limitsYes.
Indicative limits/bona fide testYes.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsProceeds must be repatriated.
Surrender requirementsIn general, up to 50% of receipts may be retained in foreign currency accounts with banks in India. In the case of specified professional, status holder exporters, 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 transactionsEffective February 4, 2004, resident individuals may remit up to US$25,000 a year for any permissible current or capital transactions.
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 other than print media companies. 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). These FIIs are required to restrict their investments in equity and debt instruments in a ratio of 70% to 30%. However, FIIs may set up separate subaccounts for 100% debt funds that may invest solely 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/subaccounts holdings and 24% (this ceiling may be raised to sectoral ceilings as applicable, provided the board of directors concerned passes a resolution and the general body meeting of the company passes a special resolution) of issued share capital for the total holdings of all registered FIIs/subaccounts 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 euro market. Nonresidents may not make portfolio investments in companies engaged in news 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 body meeting. OCBs are prohibited from making any new purchases under this scheme.
Sale or issue locally by nonresidentsIn the case of securities of Indian companies held by nonresidents, transfers to a resident, other than by sale on the stock exchange, does not require RBI permission and can be allowed by the authorized banks provided the requirements for concluding such transactions are complied with. 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 residentsGeneral 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 pre-zero 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.
Resident individuals and companies may make equity investments in companies listed abroad in 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.
Sale or issue abroad by residentsThe regulations governing purchases abroad by residents apply.
Bonds or other debt securities
Purchase locally by nonresidentsEffective November 2, 2004, the cumulative debt investment limit for the FIIs/subaccounts is US$1.75 billion (previously, US$1 billion). On November 29, 2004, the government clarified that this ceiling applies only to government securities and treasury bills and excludes corporate debt.
Effective November 2, 2004, the overall investment limit under the 70:30 debt route in dated government securities and treasury bills is US$200 million (previously, US$100 million).
Sale or issue locally by nonresidentsYes.
Purchase abroad by residentsUnder the Liberalized Remittance Facility Scheme, resident individuals are allowed to remit up to US$25,000 a calendar year for any permissible current and/or capital transaction.
Sale or issue abroad by residentsConvertible bonds in foreign currency may be issued up to the equivalent of US$500 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 repatriation basis.
Sale or issue locally by nonresidentsThese transactions require RBI approval.
Purchase abroad by residentsResidents are not allowed to purchase these instruments abroad without RBI approval.
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 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 residentsMutual funds in India 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 up to a cap of US$1 billion, 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 or option contracts to nonresidents outside India to hedge their direct investments that were made in India after January 1, 1993, subject to verification of exposure in India. FIIs may hedge the market value of their entire investment in equity or debt. NRIs may hedge the dividends due to them, balances held in FCNR and NRE accounts, and portfolio investments.
FIIs and NRIs may trade in all exchange-traded derivative contracts that have been approved by the SEBI, subject to prescribed limits. FIIs and NRIs may also invest in these contracts using rupee funds held in India on a non repatriable 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 that have borrowed foreign exchange and for their own asset and liability management. Exporters and importers are also allowed to hedge price exposures on commodities for this purpose. Residents may remit US$25,000 in permissible current and capital transactions in accordance with Schedule I of FEMA Notification I.
Controls on credit operationsAll corporations registered under the Companies Act, except financial intermediaries such as banks, nonbank financial companies, housing finance companies, and other financial institutions, are eligible to raise funds through commercial borrowing from overseas lenders, subject to certain RBI guidelines.
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, or one year as the case may be, 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. 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 nonresidentsEffective April 17, 2004, trade credits up to one year for noncapital goods and less than three years for capital goods are available up to US$20 million a transaction; ADs are permitted to guarantee such trade credits. Trade credits (buyer’s credits, supplier credits or lines of credit from firms or companies) exceeding US$20 million for financing imports of goods and services for a period less than three years are considered by the RBI, subject to certain conditions.
Financial credits
By residents to nonresidentsAn Indian entity may lend in foreign exchange to its wholly owned subsidiary abroad. Effective February 20, 2004, Indian companies are permitted to extend foreign currency loans for personal purposes for employees of their branches outside India.
To residents from nonresidentsThe maximum amount of ECB that a corporation can engage in under the automatic route is US$500 million in a financial year. All corporations registered under the Companies Act (except banks, financial institutions, housing finance companies, and NBFCs) may borrow abroad up to the equivalent of US$20 million for loans of three to five years’ average maturity and up to US$500 million loans of more than five years’ average maturity under the automatic route without RBI approval. The 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 benchmark(s), and borrowing with more than five years’ average maturity is subject to a maximum spread of 350 basis points.
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.
Banks are not permitted to issue a guarantee, standby LC, or a letter of comfort of undertaking on behalf of their constituents in favor of an overseas lenders, to access external commercial borrowings or financial credit. However, banks are permitted to issue the same instruments in favor of an overseas lender on behalf of their importer constituents for trade credits, i.e., buyers’ or suppliers’ credit for import of noncapital goods for up to a year and capital goods for a period of less than three years and up to US$20 million an import transaction, without prior RBI approval.
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 investmentIndian companies and, effective January 3, 2004, registered partnerships acquiring foreign companies or investing directly abroad in joint ventures or wholly owned subsidiaries may invest up to 100% of their net worth through the automatic route. Effective February 23, 2004, Indian corporations are allowed to fund overseas direct investments in joint venture or wholly owned subsidiaries with external commercial borrowing. Companies or firms seeking to invest in financial sector activities abroad must also obtain approval from the regulatory authorities concerned 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. Indian corporations are also permitted to utilize proceeds of ECBs for investments in joint ventures or wholly owned subsidiaries abroad. 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 the equivalent of net worth.
Any Indian company that has issued ADRs or GDRs may acquire shares of foreign companies engaged in the same area of core activity up 10 times their annual exports. 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.
Effective February 9, 2004, resident employees of a foreign company’s office, branch, or subsidiary in India 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.
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.
Effective October 4, 2004, residents no longer need prior approval of the government and RBI in respect of transfers of shares or convertible debentures, to nonresidents.
Inward direct investmentIndian companies may issue up to 100% of equity to nonresidents under the automatic route in most sectors, except for a small list that requires the approval of the FIPB and for another seven items where less than 100% is allowed (private sector banks; insurance, telecommunications, and nonretail trading companies; coal mining for captive consumption; mining for 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 trading, 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 January 16, 2004, foreign companies are allowed to establish branch offices or units in Special Economic Zones to undertake manufacturing and service activities.
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 superstar 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 a 26% share 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, PIO, or FII 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 FIFB 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 foreign venture capital investors who have obtained permission under FEMA from the RBI and are registered with SEBI to invest in an Indian venture capital undertaking or a venture capital fund.
NRIs may use funds derived from fresh 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 their 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-up 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 (only NRIs), subject to RBI approval. Effective October 1, 2004, outstanding external commercial borrowing and lump-sum fees and royalties may be converted into equity without RBI prior approval.
Controls on liquidation of direct investmentShares may be sold freely on the stock exchange and the sale proceeds repatriated. However, other sales of shares, securities, or immovable property may be allowed by authorized banks after complying with preconditions prescribed by the RBI. Prior approval of the RBI is required only in the case of sales of shares in financial sector companies or in cases where preconditions and norms have not been fulfilled. 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 it 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 are permitted to 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). Effective May 25, 2004, ADs and housing companies are permitted to extend loans to NRIs and PIOs for acquiring residences in India.
Sale locally by nonresidentsRepatriation of after-tax sales proceeds is permitted up to the amount brought in to purchase the property subject to certain conditions. 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 or proceeds thereof 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.
To residents from nonresidentsBorrowing 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. NRIs 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. The RBI considers requests for higher amounts on a nonrepatriation basis.
Transfer of assets
Transfer abroad by emigrantsADs may allow remittances of US$1 million at the time of emigration, and thereafter US$1 million a year out of balances held in an NRO account, subject to certain conditions.
Transfer into the country by immigrantsYes.
Transfer of gambling and prize earningsRemittances of earnings from sweepstakes, gambling, and lotteries are not permitted.
Provisions specific to commercial banks and other credit institutions
Borrowing abroadExternal commercial borrowing is subject to the policy framed by the RBI in consultation with the MOF. Effective March 24, 2004, ADs may avail themselves of foreign currency borrowing not exceeding 25% of their unimpaired Tier I capital or the equivalent of US$10 million, whichever is higher.
Maintenance of accounts abroadThere are no restrictions 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 foreign currency deposit resources to grant loans to residents.
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 for which the ceiling is LIBOR. The LIBOR/Swap rates prevailing on the last working day of the preceding month shall form the base for fixing the interest rates that would be offered effective the following month.
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 controlsInterest rates on deposits of residents, except savings deposits, are deregulated. However, there is a interest rate ceiling linked to international rates on FCNR (bank) deposits and NRER 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 respective boards 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 2004
Resident accountsJune 7. Balances in EFFC accounts were permitted to be used for trade-related loans to overseas importers.
July 20. Proceeds of life insurance claims were allowed to be credited to RFCD or RFC accounts.
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.
February 6. The limit beyond which documentary evidence was required for import payments was raised to US$100,000 from US$25,000.
July 9. Import duties were changed as follows: for nonalloy steel, to 10% from 15%; for alloy steel, copper, lead, zinc, and base metal, peak rate to 15% from 20%; for refractory raw materials, mineral products and catalysts, to 15% from 20%; and for refined palm oil, to 75% from 70%.
August 20. The import duty on primary and semi-finished nonalloy steel was reduced to 5% from 10%.
August 31. Under the Export Promotion Capital Goods Scheme, (1) import of secondhand capital goods were permitted without restriction on age; (2) imports of capital goods for export of agricultural products were permitted at zero duty rates; (3) transfers of capital goods to groups of companies and managed hotels were permitted; and (4) installation certificates were no longer required for movable capital goods in the service sector.
Exports and export proceedsJanuary 31. The declaration of exports of goods and software was waived for amounts up to US$25,000.
February 20. The ceiling on the export of gifts abroad was raised to Rs 500,000 a year from Rs 100,000 a year.
Payments for invisible transactions and current transfersFebruary 24. Residents were allowed to remit, without prior RBI approval, health insurance premiums, commissions on sales of property, proceeds of short-term credit to overseas offices of Indian banks, foreign television advertising fees, royalties, and franchise fees.
Capital transactionsFebruary 4. Resident individuals were permitted to remit US$25,000 a year for any permissible current or capital transactions.
Controls on capital and money market instrumentsNovember 2. The overall investment limit under the 70:30 debt route in dated government securities and treasury bills was raised to US$200 million from US$100 million.
November 2. The cumulative debt investment limit for the FIIs or subaccounts was raised to US$1.75 billion from US$1 billion in the July 2004 budget.
November 29. The government clarified that the ceiling that applied to holdings of government securities and treasury bills excluded corporate debt.
Controls on credit operationsFebruary 20. Indian companies were permitted to extend foreign currency loans for personal purposes for employees of their branches outside India.
April 17. Trade credits of up to one year for noncapital goods and up to three years for capital goods for amounts up to US$20 million were permitted. ADs were permitted to guarantee such trade credits.
Controls on direct investmentJanuary 3. Registered partnerships were allowed to invest abroad up to 100% of their net worth through the automatic route.
January 16. Foreign companies were allowed to establish branch offices or units in Special Economic Zones to undertake manufacturing and service activities.
February 9. Resident employees of a foreign company’s office, branch, or subsidiary in India, in which the foreign company held a share of not less than 51% could invest under an employee stock option plan without limit, subject to certain conditions.
February 23. Indian corporations were allowed to fund direct investments in joint ventures or wholly owned subsidiaries abroad with external commercial borrowing.
October 1. Outstanding external commercial borrowing and lump-sum fees and royalties were permitted to be converted into equity without prior RBI approval.
October 4. Residents no longer needed prior approval of the government and RBI in respect of transfer of shares or convertible debentures to nonresidents.
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.
May 25. ADs and housing finance companies in India were permitted to extend loans to NRIs and PIOs for acquiring residences in India.
Provisions specific to commercial banks and other credit institutionsMarch 24. AADs were permitted to avail of foreign currency borrowing not exceeding 25% of their Tier I capital or the equivalent of US$10 million, whichever was higher.
Changes During 2005
Imports and import paymentsMarch 1. The peak import tariff rate on nonagricultural goods was reduced to 15% from 20%, with a few exceptions. The ad valorem component of the import duty on textiles, fabrics, and garments was reduced to 15% from 20%.
March 1. Import duties were reduced as follows: (1) primary and semi-finished forms of (a) stainless steel, other alloy steel, and ferro-alloys; (b) aluminum; (c) copper; (d) zinc; (e) tin; (f) base metals (such as tungsten, magnesium, cobalt, titanium, etc.), to 10% from 15%; (2) lead, to 5% from 15%; (3) inputs for the manufacture of steel such as refractories, raw materials for refractories and graphite electrodes, to 10% from 15%; (4) certain polymers, to 10% from 15%; (5) certain other chemicals, to 5% from 10%; (6) crude petroleum, to 5% from 10%; (7) motor spirit (petrol) and high speed diesel, to 10% from 15%; and (8) passenger baggage, to 35% from 40%.

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