Borrowing and Lending under FEMA

Borrowing and Lending under FEMA
HDS & Co. Chartered Accountants Page 1 of 26
- CA Namrata Dedhia
(namrata@hdsca.com)
Background
The international financial markets are a very lucrative source of debt finance, especially for
businesses in India, on account of the low interest rates prevalent globally when compared to the
Indian financial markets. Furthermore, multinationals investing in India prefer to infuse capital into
the Indian entities as a combination of debt and equity for various commercial and financial reasons
such as regular and assured return on investment in the form of interest, possibility of repayment of
debt once the Indian operations are established, tax efficiency of interest payments as against
dividends, etc.
The Reserve Bank of India (“RBI”) however adopts a very conservative approach to transactions of
cross-border borrowing and lending. While borrowing and lending between residents and non-
residents is possible, several conditions are imposed by RBI to ensure that such transactions do not
adversely affect the Indian financial system. In comparison to the relatively lenient attitude of RBI
towards foreign investments in India, any contraventions related to borrowing and lending
transactions are viewed rather seriously.
Legal Framework
The provisions governing borrowing and lending transactions under FEMA emanate from section 6 of
the FEMA Act, Foreign Exchange Management (Borrowing and Lending in Foreign Exchange)
Regulations, 20001
(“FEMA 3”), Foreign Exchange Management (Borrowing and Lending in Rupees)
Regulations, 20002
(“FEMA 4”), Schedule 5 of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 20003
(“FEMA 20”) and Schedules I and
IV of Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 20044
(“FEMA 120”) as amended from time to time by RBI notifications.
The provisions of the FEMA 3 as amended from time to time are summarised by the RBI in the
Master Circular on External Commercial Borrowings and Trade Credits issued on 1st
July every year.
While the master circular has no legal sanctity, it serves as an easy reference guide, summarising all
notifications and circulars till the date of the circular, in one place.
Based on the provisions of the various regulations above, the terms borrowing and lending under
FEMA would cover within their ambit, transactions of a wide variety, including loans, overdrafts,
debt instruments, non-convertible or optionally convertible debentures, non-convertible or optionally
convertible preference shares, foreign currency exchangeable bonds (“FCEBs”), foreign currency
1
Notification No. FEMA 3/2000-RB dated 3rd
May 2000
2
May 2000
3
May 2000
4
Notification No. FEMA 120/2004-RB dated 7th
July 2004

convertible bonds (“FCCBs”) as well as government securities. Compulsorily convertible debentures
and preference shares, however, are treated as equity investments and thus, are governed by
regulations concerning Foreign Direct Investment (“FDI”) in India.
Borrowing and Lending in Foreign Exchange
FEMA 3 gives general permission to authorised dealers (“AD”) and their branches as well as to
persons other than ADs to borrow and lend in foreign exchange in certain cases. Further, it lays down
various conditions for availing of External Commercial Borrowings (“ECB”) both under the
automatic and approval route as well as monitors Trade Credits.
General Permission
1) To an Authorised Dealer:
Regulation 4 of FEMA 3 gives general permission to an AD in India or its branch outside India to
lend in foreign currency as follows –
a) By an overseas branch of an Indian bank, in the normal course of its banking business outside
India
b) To its constituents in India for their requirements in respect of foreign exchange or rupee
working capital or capital expenditure, subject to prudential norms and other guidelines issued
by RBI from time to time
c) As credit facility to a wholly owned subsidiary (“WOS”) or joint venture (“JV”) abroad of an
Indian entity, where the Indian entity holds not less than 51% of the equity
d) To its constituent against funds held in Resident Foreign Currency (“RFC”) account
e) Against funds held in NRE / FCNR accounts, by an overseas branch of the AD
f) To another AD in India
g) As foreign currency loan in India against funds held in FCNR(B) account.
Further, an AD is given general permission to borrow in foreign currency as under –
a) From its head office or branch or correspondent outside India, or any other entity as permitted
by RBI, upto 100% of its unimpaired Tier I capital or USD 10 million, whichever is higher
b) By an overseas branch of an Indian bank, in the normal course of its banking business outside
India
c) From a bank or financial institution outside India, for granting pre-shipment or post-shipment
foreign currency credit to its exported constituent
2) To persons other than Authorised Dealer:
Regulation 5 of FEMA 3 provides general permission to lend in foreign currency to persons other
than ADs as under –
a) By an Indian entity, to its WOS or JV abroad, provided it is within the overall limit of 400%
of net worth of the Indian entity, as required under FEMA 120
b) By a resident, to his overseas importer customer, out of funds held in EEFC account, for trade
related purposes. Where the amount of such loan exceeds USD 100,000, the borrower is

required to provide a guarantee of a internationally reputed bank situated outside India, in
favour of the lender.
c) By Export Import Bank of India, IDBI, IFCI, ICICI, SIDBI or any other institution, to their
constituent in India, out of foreign currency borrowings raised by them with the approval of
the Central Government for onward lending
d) By Indian companies, to the employees of their overseas branches for personal purposes, in
accordance with the terms and conditions of the policy for staff welfare or employee loans of
the company, as applicable to its Indian and overseas staff.
Further, general permission is also available for borrowing in foreign currency to persons other
than ADs as under –
a) By a resident, from a bank situated outside India, for execution outside India of a turnkey
project or civil construction contract or for exports on deferred payment basis
b) Credit availed by an Indian importer for import of goods into India from the overseas supplier
of goods, for a period not exceeding 6 months
c) Interest-free loan of upto USD 250,000 or its equivalent, by a resident individual, from close
relative (as defined in Companies Act 1956) outside India, provided that the minimum
maturity period of the loan is one year and it is received through normal banking channels or
in the NRE / FCNR account of the relative.
It must be noted that all the above cases of general permission would require that the extant provisions
of respective regulations such as prudential norms, FEMA 120, Deposit regulations, Export
regulations, etc. should also be complied with.
External Commercial Borrowings
Regulation 6 of FEMA 3 provides that borrowings in foreign exchange other than those covered by
the general permission can be availed of by an Indian resident either under the automatic route or
under the approval route or as Trade Credits. Schedule I and Schedule II to FEMA 3 lay down the
various conditions for automatic route and approval route respectively.
1) Automatic Route:
a) Eligible Borrowers
• Corporates, including those in the hotel, hospital, software sectors
• SEZ Units can raise ECB for their own requirement. However, they cannot transfer or
onlend the funds to sister concerns or any unit in Domestic Tariff Area.
• NBFCs - Infrastructure Finance Companies (“IFCs”) and NBFCs - Asset Finance
companies (“AFCs”)
• NGOs engaged in micro finance activities
• Micro Finance Institutions (“MFIs”), which are registered under the Societies
Registration Act, 1860, or Indian Trust Act, 1882, or any of the cooperative acts, or
NBFCs categorized as Non Banking Financial Company - Micro Finance Institutions
(“NBFC-MFIs”) or Section 8 (erstwhile Section 25) Companies, which are involved in
micro finance activities

• SIDBI
• Companies in miscellaneous services sector such as training activities (but not
educational institutes), research and development activities and infrastructure support
sector.
• Holding Companies / Core Investment Companies (“CICs”) falling under the RBI
regulations are permitted to raise ECB for project use in Special Purpose Vehicles
(“SPVs”) which are engaged in the infrastructure sector.
The following entities are prohibited from raising ECB under the automatic route -
• Financial intermediaries, such as banks, Financial Institutions, Housing Finance
Companies (“HFC”) and other NBFCs which are not specifically permitted to raise ECB
• Individuals, Trusts (other than those engaged in Micro-finance activities) and Non-Profit
making organizations
• Trading business, logistics services, financial services and consultancy services, which
are not covered under miscellaneous services
NGOs and MFIs engaged in micro finance must meet the following conditions -
• The entity should have a satisfactory borrowing relationship for at least 3 years with a
scheduled commercial bank which is an AD, and
• A certificate of due diligence on `fit and proper’ status of the Board/ Committee of
management of the borrowing entity is required from the designated AD bank
Similarly, certain conditions have been prescribed in case of ECB raised by Holding
companies or CICs for use in SPVs5
.
b) Recognised Lenders
• Borrowers can raise ECB from internationally recognized sources, such as international
banks, international capital markets, multilateral financial institutions (such as IFC, ADB,
CDC, etc.) / regional financial institutions and Government owned development financial
institutions, export credit agencies, suppliers of equipment, foreign collaborators and
foreign equity holders (“FEHs”).
• Companies in miscellaneous services sector can borrow only from overseas direct /
indirect equity holders and group companies
• NGOs and MFIs registered as societies, trusts and co-operatives can avail of ECBs from
international banks, multilateral financial institutions, export credit agencies, overseas
organisations and individuals.
• NBFC-MFIs are permitted to avail of ECBs from international banks, multilateral
institutions/ regional financial institutions, FEHs and overseas organizations.
5
Refer A.P. (DIR Series) Circular No. 78 dated December 03, 2013

• Section 8 (erstwhile Section 25) Companies engaged in micro finance can avail of ECBs
from international banks, multilateral financial institutions, export credit agencies, FEHs,
overseas organizations and individuals.
A FEH must hold minimum paid-up equity in the borrower as follows:
(i) For aggregate ECB up to USD 5 million - minimum paid-up equity of 25% held
directly by the lender,
(ii) For aggregate ECB exceeding USD 5 million - minimum paid-up equity of 25% held
directly by the lender and ECB liability-equity ratio not exceeding 4:1
ECB from indirect equity holders is permitted only if the indirect equity holding in the Indian
company by the lender is at least 51%. Also, a group company can grant ECB if both the
borrower and the lender are subsidiaries of the same parent.
In calculating equity, paid-up capital and free reserves (including the share premium received
in foreign currency) as per the latest audited balance sheet shall be reckoned. In case of more
than one FEH in the borrower, only the portion of the share premium brought in by the
lender(s) concerned shall be considered.
An Overseas Organizations proposing to lend ECB should to furnish to the AD, a certificate
of due diligence from an overseas bank, comprising of the following
• that the lender maintains an account with the bank for at least two years,
• that the lending entity is organised as per the local laws and held in good esteem by the
business/local community, and
• that there is no criminal action pending against it.
Also, an Individual Lender has to obtain a certificate of due diligence from an overseas bank
indicating that the lender maintains an account with the bank for at least two years. Also, all
documents such as audited statement of account and income tax return, which the lender may
furnish, need to be certified and forwarded by the overseas bank. Individual lenders from
countries which do not follow Know Your Customer (“KYC”) guidelines are not eligible to
extend ECB.
c) Amount and Maturity
Depending upon the category of the eligible borrower, different ceilings have been prescribed
for the maximum amount of ECB that can be availed in a financial year. The maximum
amount, expressed in US Dollars, will also cover the equivalent amount of other currencies.
• Corporates in the services sector viz. hotels, hospitals and software sector and
miscellaneous services sector are allowed to avail up to USD 200 million. The proceeds
of the ECBs cannot be used for acquisition of land.
• Other Corporates can raise upto USD 750 million.

• NGOs and MFIs can raise up to USD 10 million. The designated AD bank has to ensure
that at the time of drawdown the forex exposure of the borrower is fully hedged.
• NBFC-IFCs can avail of ECB up to 75% of their owned funds and must hedge 75% of
their currency risk exposure.
• NBFC-AFCs can also avail of ECBs up to 75% of their owned funds subject to a
maximum of USD 200 million with a minimum maturity of 5 years and must hedge the
currency risk exposure in full.
• SIDBI can avail of ECB to the extent of 50% of its owned funds, subject to a ceiling of
USD 500 million.
• The minimum average maturity of ECB shall be as under –
Amount of ECB in a financial year Minimum Average Maturity
USD 20 million or its equivalent Three years
Above USD 20 million or its equivalent and upto
USD 750 million or its equivalent
Five years
ECB up to USD 20 million can have call/put option provided the requirement of
minimum average maturity of three years is met before exercising the option.
d) Currency
All eligible borrowers can avail of ECBs designated in INR from recognised lenders as per
the extant ECB guidelines6
. Further, NGOs engaged in micro finance activities can avail of
ECBs designated in INR, from overseas organizations and individuals as per the extant
guidelines.
e) All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, fees payable in Indian Rupees, and withholding tax. RBI
prescribes and regularly reviews the maximum all-in-cost for ECBs. The current all-in-cost
ceilings for ECB are as under:
Average Maturity Period Maximum Margins over 6 month LIBOR for the
currency of borrowing or applicable benchmark
Three years to five years 350 basis points
More than five years 500 basis points
If the ECB is availed at a fixed interest rate, the swap cost plus margin should be within the
prescribed ceiling of the floating rate plus the applicable margin. Further, the rate of penal
interest should not be more than 2% of the all-in-cost of ECB.
f) End-use
6
Refer A.P. (DIR Series) Circular No. 25 dated September 3, 2014

As borrowed funds from the international markets are permitted to be used in the Indian
businesses, RBI imposes strict end-use restrictions on ECB. The permissible end-uses are -
• For investment such as import of capital goods as per the Foreign Trade Policy (“FTP”),
new projects, modernization/expansion of existing production units in real sector -
industrial sector including small and medium enterprises (“SME”), infrastructure sector
and specified service sectors, viz. hotel, hospital and software and miscellaneous services.
• Overseas Direct Investment in JV / WOS abroad.
• For first stage as well as subsequent stages of acquisition of shares under the
Government’s disinvestment programme of PSU shares.
• Interest during Construction for Indian companies which are in the infrastructure sector,
provided such interest is capitalized and forms part of the project cost.
• For on-lending to self-help groups or for micro-credit or for bonafide micro finance
activity including capacity building by NGOs.
• For on-lending to the infrastructure sector by NBFC-IFCs.
• For financing the import of infrastructure equipment for leasing to infrastructure projects
by NBFC-AFCs.
• Maintenance and operations of toll systems for roads and highways for capital
expenditure provided they form part of the original project
• For onlending by SIDBI to the borrowers in the MSME sector for permissible end-uses,
having natural hedge by way of foreign exchange earnings. In case of on-lending by
SIDBI in INR, the foreign currency risk shall be fully hedged by it.
• Refinancing of Bridge Finance (including buyers’ / suppliers’ credit) availed of for import
of capital goods by companies in Infrastructure Sector
• For Import of services, technical know-how and payment of license fees as part of import
of capital goods by companies in the manufacturing and infrastructure sectors, subject to
certain procedural conditions7
.
• For general corporate purposes (including working capital) from direct FEH by
companies in manufacturing, infrastructure, hotels, hospitals and software sector with a
minimum average maturity of 7 years subject to the following conditions:
i. The funds should not be used for any purpose not permitted under the extant ECB
guidelines,
ii. Repayment of the principal shall commence only after completion of minimum
average maturity of 7 years, and
iii. No prepayment will be allowed before maturity.
Infrastructure sector is defined in detail to include various facets of sectors such as Energy,
Communication, Transport, Water and sanitation, Mining, Exploration and Refining and
Social and commercial infrastructure including hospitals, hotels, etc.8
7
Refer A.P. (DIR Series) Circular No. 119 dated June 26, 2013
8
Refer Master Circular on External Commercial Borrowings and Trade Credit for detailed definition

g) Payment for Spectrum Allocation
Successful Bidders of 2G spectrum re-auction can initially make upfront payment for
spectrum either out of Rupee loans availed from domestic lenders or out of short term foreign
currency loan in the nature of bridge finance. These loans can subsequently be refinanced
with a long-term ECB provided it is raised within 18 months from the date of sanction of the
Rupee loans or from the date of drawdown of the bridge finance.
The ECB can be availed from the ultimate parent company without any limit on ECB
liability-equity ratio provided the lender holds minimum paid-up equity of 25% in the
borrower, either directly or indirectly. Also, such ECB cannot be raised from overseas
branches / subsidiaries of Indian banks.
h) End-uses not permitted
The proceeds of ECB shall not be utilized for any purpose other than those mentioned above
including the following –
• For on-lending or investment in capital market or acquiring a company in India by a
corporate. Investment in SPVs, Money Market Mutual Funds, etc. is also considered as
investment in capital markets.
• For real estate sector.
• For general corporate purpose including working capital other than that expressly
permissible and repayment of existing rupee loans.
• For acquisition of land.
i) Guarantees
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by
banks, Financial Institutions and NBFCs from India relating to ECB is not permitted.
j) Security
The choice of security to be provided to the overseas lender is left to the borrower. AD banks
can allow creation of charge on immovable assets, movable assets, financial securities and
issue of corporate and / or personal guarantees in favour of overseas lender / security trustee
during the currency of the ECB with security co-terminating with underlying ECB, subject to
the following conditions:
• The underlying ECB is in compliance with the extant ECB guidelines
• The Loan Agreement contains a security clause requiring the ECB borrower to create
charge, in favour of overseas lender / security trustee, on immovable assets / movable
assets / financial securities / issuance of corporate and / or personal guarantee, and
• No objection certificate, wherever necessary, from existing lenders in India is obtained.
The A.P. (DIR Series) Circular No. 55 dated January 01, 2015 issued by RBI further lists
down detailed conditions for creation of charge on each category of assets.

k) Parking of ECB proceeds
Till the time the ECB proceeds are not utilised for permissible end-uses, the borrowers are
permitted to either keep ECB proceeds abroad or to remit these funds to India.
• Where ECB proceeds are parked overseas, the same can be invested in liquid assets such
as Deposits or Certificate of Deposit or other products offered by banks or Treasury bills
and other monetary instruments of one year maturity, rated not less than AA(-) by
Standard and Poor / Fitch IBCA or Aa3 by Moody’s and deposits with overseas branches
/ subsidiaries of Indian banks abroad. The funds should be invested in a manner that the
investments can be liquidated whenever funds are required by the borrower in India.
• ECB proceeds meant for Rupee expenditure in India such as local sourcing of capital
goods, on-lending to Self-Help Groups or for micro credit, repayment of rupee loan
availed from domestic banks, etc. should be repatriated to India immediately. Pending
utilisation, the proceeds can be parked in term deposits with AD banks for a maximum of
six months subject to certain conditions9
. The rupee funds cannot be used for investment
in capital markets, real estate or for inter-corporate lending.
l) Prepayment
Prepayment of ECB up to USD 500 million can be permitted by the AD without prior
approval of RBI provided the minimum average maturity period as applicable to the loan is
met.
m) Refinancing of an existing ECB
The existing ECB can be refinanced by raising a fresh ECB provided –
• The fresh ECB is raised at a lower all-in-cost,
• The outstanding maturity of the original ECB is not reduced
• The amount of fresh ECB is eligible to be raised under the automatic route.
• The fresh ECB is not raised from overseas branches / subsidiaries of Indian banks.
n) Reschedulement of ECB
The AD is given the power to permit reschedulement of ECB due to any changes in the draw-
down and / or repayment schedule, subject to the following –
• Changes, if any, in all-in-cost is only on account of the change in average maturity period
post re-schedulement, the ECB should be in conformity with applicable guidelines. Thus,
there should not be any increase in the rate of interest and no additional cost should be
involved.
• Re-schedulement is permitted only once, before the maturity of the ECB.
• If the lender is an overseas branch of a domestic bank, the applicable prudential norms
should be complied with.
• The changes should be reported through revised Form 83.
9
Refer A.P. (DIR Series) Circular No. 39 dated November 21, 2014

• The borrower should not appear in the default / caution list of RBI and should not be
under the investigation of Directorate of Enforcement.
The above provisions do not apply to FCCBs. Further, any elongation or rollover in the
repayment upon expiry of the original maturity of the ECB requires prior approval of RBI.
o) Corporates Under Investigation
All entities against which investigations / adjudications / appeals by the law enforcing
agencies are pending can avail ECBs as per the current norms as per their eligibility,
irrespective of the pending investigations and their outcome. The AD is required to intimate
the concerned agencies while approving the application for ECB.
p) Procedure
Under the automatic route of ECB, no prior approval of RBI is required to enter into the loan
agreement. However, a Loan Registration Number (“LRN”) has to be obtained from RBI by
filing Form 83 through the AD before drawing down the ECB.
2) Approval Route
a) Eligible Borrowers
• Borrowers obtaining loan through onlending by the EXIM Bank
• Banks and financial institutions participating in the textile or steel sector restructuring
package as approved by the Government can raise ECB to the extent of their investment
in the package.
• ECB with minimum average maturity of 5 years by NBFCs from multilateral financial
institutions, reputable regional financial institutions, official export credit agencies and
international banks to finance import of infrastructure equipment for leasing to
infrastructure projects.
• HFC for issue of FCCBs provided (i) the minimum net worth of the HFC during the
previous three years is not less than Rs. 500 crore, (ii) the FCCBs are listed on the BSE or
NSE, (iii) minimum size of FCCB issue is USD 100 million and (iv) the purpose / plan of
utilization of funds should be submitted.
• SPVs, or any other entity notified by RBI, set up to finance infrastructure companies /
projects exclusively, which are treated as Financial Institutions.
• Multi-State Co-operative Societies engaged in manufacturing activity, which is
financially solvent and has submitted its up-to-date audited balance sheet.
• Developers of SEZ and National Manufacturing Investment Zones (“NMIZs”).
• SIDBI
• Developers, builders, HFCs, National Housing Bank (“NHB”)
• Holding Companies and CICs governed by RBI for project use in SPVs in the
infrastructure sector subject to the conditions applicable under the automatic route.
• Other cases falling outside the purview of the automatic route limits in respect of amount
of ECB and maturity period.

b) Recognised Lenders
• Internationally recognised sources, such as international banks, international capital
markets, multilateral financial institutions / regional financial institutions and
Government owned development financial institutions, export credit agencies, suppliers'
of equipment, foreign collaborators and FEH.
• Overseas branches / subsidiaries of Indian banks are not recognised as lenders if the end
use is repayment / refinance of Rupee loans raised from domestic banks.
The conditions for qualifying as a FEH, indirect equity holders, group companies as well as
manner of computation of equity are same as those under the automatic route, except that the
maximum permissible ECB liability-equity ratio is 7:1 in case of aggregate ECB raised from
FEH exceeding USD 5 million
c) Amount and Maturity
• Corporates in the services sector can avail ECB exceeding USD 200 million.
• Other eligible borrowers can avail ECB beyond USD 750 million.
d) Currency
All eligible borrowers can avail of ECBs designated in INR from recognised lenders as per
the extant ECB guidelines.
e) All-in-cost ceilings
All-in-cost ceilings under this route are same as applicable under the automatic route.
f) End-use
• Investment, such as import of capital goods, implementation of new projects,
modernization/expansion of existing production units, in the real sector – industrial sector
including SME and infrastructure sector - in India.
• Overseas Direct Investment in JV / WOS.
• Interest during Construction for Indian companies in the infrastructure sector provided
such interest is capitalized and forms part of the project cost.
• Acquisition of shares under the Government’s disinvestment programme of PSU shares.
• Repayment of Rupee loans availed of from domestic banking system by Indian
companies in the infrastructure sector by utilising 25% (40% in case of power sector) of
the fresh ECB raised, subject to the following conditions:
i. at least 75% of the fresh ECB should be utilised for capital expenditure towards a
'new infrastructure' project(s),
ii. the remaining 25% shall only be utilized for repayment of Rupee loan availed for
'capital expenditure' of earlier completed infrastructure project(s),
iii. the refinance shall be utilized only for the Rupee loans which are outstanding in the
books of the financing bank concerned, and

iv. Fresh ECB should not be raised from overseas branches / subsidiaries of Indian
banks.
• For import of services, technical know-how and payment of license fees as part of import
of capital goods subject to same conditions as in the automatic route.
• Replacement of short term credit (including buyers’ / suppliers’ credit) in the nature of
bridge finance availed with RBI’s prior approval by Indian companies in the
infrastructure sector for import capital goods.
• For providing infrastructure facilities within SEZ by SEZ developers and Developers of
NMIZs.
• For on-lending by SIDBI to MSME sector beyond 50% of their owned funds, subject to a
ceiling of USD 500 million per financial year and same hedging requirements as under
the automatic route.
• For working capital upto March 31, 2015 by Airline companies possessing license from
DGCA for passenger transportation based on the cash flow, foreign exchange earnings
and the capability to service the debt provided and subject to certain conditions10
.
• For general corporate purposes from direct FEH subject to the same conditions as are
applicable under the automatic route.
g) Payment for Spectrum Allocation
Initial rupee payment for spectrum allocation by eligible borrowers in the Telecom sector can
be refinanced through long-term ECB provided –
• It is raised within 12 months from the date of payment of the final instalment to the
Government,
• AD should monitor the end-use of funds,
• Banks in India are not permitted to provide any form of guarantees,
• It should not be raised from overseas branches / subsidiaries of Indian banks, and
• All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost,
average maturity, etc. should be complied with.
h) Repayment of Rupee loans and/or fresh Rupee capital expenditure for companies with
consistent forex earnings – USD 10 billion scheme
Indian companies in the manufacturing, infrastructure sector and hotel sector, with a total
project cost of INR 250 crore or more, can avail ECB for repayment of outstanding Rupee
loans taken for capital expenditure from the domestic banking system and/or fresh Rupee
capital expenditure provided
• They are consistent foreign exchange earners during the past three financial year
• They are not in the default list/caution list of the RBI.
10
Refer A.P. (DIR Series) Circular No. 113 dated April 24, 2012 and A.P. (DIR Series) Circular No. 113 dated
March 26, 2014

• The overall ceiling for such ECBs shall be USD 10 billion and the maximum ECB that
can be availed by an individual company or group, as a whole, under this scheme will be
USD 3 billion.
• The maximum permissible ECB that can be availed of by an individual company will be
the higher of 75% of the average annual export earnings realized during the past three
financial years or 50% of the highest foreign exchange earnings realized in any of the
immediate past three financial years.
• SPVs, which are in existence for at least one year and do not have sufficient track record
for three financial years, the maximum permissible ECB will be 50% of the annual export
earnings realized during the past financial year.
• Repayment of ECB should not be done by purchasing foreign exchange from Indian
markets but only out of the foreign exchange earnings of the borrower.
• ECB cannot be raised from overseas branches / subsidiaries of Indian banks.
Within the overall ceilings given above, Indian companies which have set-up a JV / WOS or
have acquired assets overseas can avail ECB for repayment of all term loans having average
residual maturity of 5 years and above or credit facilities availed from domestic banks for
overseas investment, subject to –
• The maximum ECB that can be availed by an individual company will be 75% of the
average annual export earnings realized during the past three financial years or 75% of
the assessment made about the average foreign exchange earnings potential for the next
three financial years from the JV / WOS / assets abroad as certified by Statutory Auditors
/ CA / CPA / Category I Merchant Banker registered with SEBI / an Investment Banker
outside India registered with the appropriate regulatory authority in the host country.
• Repayment should be made out of foreign exchange earnings from the overseas JV /
WOS / assets.
• Past earnings in the form of dividend/repatriated profit and other forex inflows from
overseas JV/WOS/assets will be reckoned as foreign exchange earnings.
i) ECB for Low Cost Affordable Housing
This scheme has been introduced by RBI for raising ECB for low cost affordable housing
projects. It is applicable for financial years 2013-14 and 2014-15 with an aggregate limit of
USD 1 billion for each financial year for ECBs.
• A low cost affordable housing project is one in which at least 60% of the permissible FSI
would be for units having maximum carpet area up to 60 square meters. Slum
rehabilitation projects will also be eligible based on the parameters to be set by the
Central Sanctioning and Monitoring Committee of the Affordable Housing in Partnership
Scheme constituted for the purpose.
• ECB proceeds shall not be utilized for acquisition of land.
• Developers/builders which are companies, having minimum 3 years’ experience in
undertaking residential projects can avail ECBs provided
i. They have good track record in terms of quality and delivery.
ii. All necessary clearances from various bodies are available on record.

iii. They should not have defaulted in any of their financial commitments to banks/
financial institutions or any other agencies.
iv. The project should not be a matter of litigation.
v. ECB should be swapped into Rupees for entire maturity on fully hedged basis.
• HFCs registered with the NHB can also avail of ECB for financing prospective owners of
low cost affordable housing units subject to the following -
i. The minimum Net Owned Funds (NOF) of the HFC for the past three financial years
should be INR 300 crore.
ii. The ECB should be within overall borrowing limit of 16 times of their NOF.
iii. The net NPA should not exceed 2.5% of the net advances.
iv. The maximum loan amount sanctioned to the individual buyer can be INR 25 lakh
and the cost of the individual housing unit shall not exceed INR 30 lakh.
v. ECB should be swapped into Rupees for entire maturity on fully hedged basis.
vi. A certificate from NHB should be submitted to the effect that the availment of ECB is
for financing prospective owners of individual units for the low cost affordable
housing.
vii. NHB should ensure that the interest rate spread charged by them to the ultimate buyer
is reasonable.
• NHB can also raise ECB for financing low cost affordable housing units of individual
borrowers. Further, if a developer of low cost affordable housing project is unable to raise
ECB directly, NHB is permitted to on-lend the ECB proceeds to such developers which
satisfy the conditions prescribed for developers / builders subject to the interest rate
spread set by RBI.
• Interest rate spread to be charged by NHB may be decided by NHB taking into account
cost and other relevant factors.
• Builders / developers meeting the eligibility criteria shall apply to NHB, which shall act
as the nodal agency for deciding a project’s eligibility as a low cost affordable housing
project, and on being satisfied, forward the application to RBI.
• Developers / builders / HFCs / NHB will not be permitted to raise FCCBs under this
scheme.
j) End-uses not permitted
As under the automatic route, the ECB proceeds are not permitted to be utilised for any
purpose other than those mentioned above including for on-lending or investment in capital
market or acquiring a company in India, for real estate or for general corporate purpose
including working capital and repayment of existing Rupee loans.
k) Guarantee
Similar to the restriction in automatic route, issuance of guarantee, standby letter of credit,
letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating
to ECB is not normally permitted. However, applications for the same in the case of SME are
considered on a case to case basis, subject to prudential norms.

Also, in order to facilitate capacity expansion and technological upgradation in Indian textile
industry, issue of guarantees, etc. by banks in respect of ECB by textile companies for
modernization or expansion of textile units is considered under the Approval Route, subject to
prudential norms.
l) Security and Parking of ECB proceeds
The requirements in relation to security offered by the borrower to the lender and creation of
charge on the same as well as parking of ECB proceeds are similar to those applicable under
the automatic route.
m) Prepayment
Prepayment of ECB beyond USD 500 million will be considered by RBI under the Approval
Route subject to compliance with the stipulated minimum average maturity period as
applicable to the loan.
n) Refinancing/reschedulement of an existing ECB
The existing ECB can be refinanced by raising a fresh ECB subject to conditions similar to
those under the automatic route except that the amount of fresh ECB is beyond the eligible
limit under the automatic route. Reschedulement of existing ECB is also subject to same
conditions as applicable under automatic route.
o) Procedure
Applicants are required to submit an application in form ECB through the AD to RBI along
with necessary documents, which are considered by an Empowered Committee, set up by
RBI.
3) Issue of FCCBs
FCCBs are governed by FEMA 120, the requirements of which are as under –
a) The maturity of FCCB should not be less than 5 years,
b) The call & put option, if any, should not be exercisable prior to 5 years,
c) FCCBs should be issued without any warrants attached,
d) The issue related expenses shall not exceed 2% of issue size in case of private placement and
4% of the issue size in other cases.
In addition to the above, all regulations applicable to ECBs are also applicable to FCCBs.
a) Redemption of FCCBs
For Indian companies which may be facing difficulty in meeting the redemption obligations,
the AD is permitted to allow them to refinance the outstanding FCCBs, under the automatic
route, subject to the following conditions –
• Fresh ECBs/ FCCBs shall be in accordance with the extant ECB guidelines,

• The amount of fresh ECB/FCCB shall not exceed the redemption value at maturity of the
outstanding FCCBs,
• The fresh ECB/FCCB shall not be raised more than six months prior to the maturity date
of the outstanding FCCBs,
• The purpose of ECB/FCCB shall be clearly mentioned as ‘Redemption of outstanding
FCCBs’ in Form 83 at the time of obtaining LRN from RBI,
• The AD should monitor the end-use of funds,
• Fresh ECB / FCCB exceeding USD 500 million will fall under the approval route, and
• Fresh ECB / FCCB availed will be reckoned as part of the limit of USD 750 million
available under the automatic route.
b) Restructuring of FCCBs
Restructuring of FCCBs involving change in the existing conversion price is not permissible.
Proposals for restructuring of FCCBs not involving change in conversion price are considered
under the approval route.
4) Foreign Currency Exchangeable Bonds
FCEB refers to a bond expressed in foreign currency, the principal and interest in respect of
which is payable in foreign currency. These are issued by an Issuing Company and subscribed to
by a non-resident, in foreign currency and exchangeable into equity share of another company,
called the Offered Company, either wholly or partly or on the basis of any equity related warrants
attached to debt instruments. These may be denominated in any freely convertible foreign
currency.
• The Issuing Company should be part of the promoter group of the Offered Company and
should hold the equity share/s being offered at the time of issuance of FCEB.
• The Offered Company should be a listed company, engaged in a sector eligible to receive FDI
and to issue or avail of FCCB or ECB.
• An Indian company, which is not eligible to raise funds from the Indian securities market,
including a company which has been restrained from accessing the securities market by the
SEBI, shall not be eligible to issue FCEB.
• Entities complying with the FDI policy at the time of issue of FCEB can subscribe to FCEB.
If the FDI policy requires prior approval of the Foreign Investment Promotion Board
(“FIPB”), the same should be obtained.
• Entities which are prohibited from buying, selling or dealing in securities by the SEBI are not
eligible to subscribe to FCEB.
a) End-use of FCEB proceeds
• Investment overseas by Issuing Company by way of direct investment including in JV or
WOS abroad,
• Investment by Issuing Company in the promoter group companies.
• Promoter group companies receiving investments out of the FCEB proceeds may utilize
the amount in accordance with end-uses prescribed under the ECB policy.

b) End-uses not permitted:
The promoter group company receiving investments cannot utilise the same for investments
in the capital market or in real estate in India.
c) All-in-cost ceilings:
The rate of interest payable on FCEB and the issue expenses incurred in foreign currency
shall be within the all-in-cost ceiling under the ECB policy.
d) Pricing of FCEB:
At the time of issuance of FCEB, the exchange price of the offered listed equity shares shall
not be less than the higher of the following two:
• Average of weekly high and low of the closing prices of the shares quoted on the stock
exchange during the six months preceding the relevant date; and
• Average of weekly high and low of the closing prices of the shares quoted on a stock
exchange during the two week preceding the relevant date.
e) Average Maturity:
Minimum maturity of FCEB shall be five years. The exchange option can be exercised at any
time before redemption. While exercising the exchange option, the holder of the FCEB must
take delivery of the offered shares. Net settlement of FCEB in cash is not permissible.
f) Parking of FCEB proceeds abroad:
The proceeds of FCEB may be retained and / or deployed overseas by the issuing / promoter
group companies as per the ECB policy or repatriated to India to the borrowers’ Rupee
accounts with the AD pending utilization for permissible end-uses. The issuing company
should also submit audit trail of the end-use of the proceeds by the issuing company /
promoter group companies to RBI duly certified by the AD.
g) Operational Procedure:
Issuance of FCEB shall require prior approval of RBI under the Approval Route. Other
reporting requirements for FCEB are as per the extant ECB policy.
5) Conversion of ECB into Equity
ECB can be converted into equity subject to the following conditions –
a) The activity of the company is covered under the Automatic Route for FDI or Government
(FIPB) approval for foreign equity participation has been obtained by the company.
b) The foreign equity holding after conversion is within the applicable sectoral cap.
c) Pricing of shares shall be worked out as per the applicable pricing guidelines with reference to
the date of conversion.
d) In case of conversion of ECB denominated in foreign currency, the exchange rate prevailing
on the date of the agreement between the parties concerned for such conversion shall be

applied. It is permissible to issue equity shares for a rupee amount less than the converted
amount by a mutual agreement with the ECB lender.
e) All foreign currency payables or liabilities such as lump sum fees, royalties, etc. permitted to
be converted to equity shares shall be calculated in the same manner as above.
6) Reporting Requirements
a) For allotment of LRN, borrowers are required to submit Form 83, in duplicate, certified by a
Company Secretary or Chartered Accountant to the AD, of which one copy is to be forwarded
by the AD to Department of Statistics and Information Management (“DSIM”), RBI. Copies
of loan agreement and offer documents for FCCB are not required to be submitted.
b) The borrower can draw-down the loan only after obtaining the LRN from DSIM, RBI.
c) Borrowers are required to submit a monthly return in form ECB-2 certified by the AD bank
so as to reach DSIM, RBI within seven working days from the close of the month to which it
relates.
d) Conversion of ECB may be reported to RBI as follows
• Complete conversion of outstanding ECB into equity is required to be reported in form
FC-GPR to the concerned Regional Office of RBI as well as in form ECB-2 to the DSIM,
RBI within seven working days from the close of relevant month. The words "ECB
wholly converted to equity" should be clearly indicated on top of the ECB-2 form. Once
reported, ECB-2 is not required to be filed in the subsequent months.
• In case of partial conversion, borrowers are required to report the converted portion in
form FC-GPR as well as in form ECB-2, differentiating the converted portion from the
unconverted portion. The words "ECB partially converted to equity" should be indicated
on top of the ECB-2 form. In subsequent months, the outstanding portion of ECB will
continue to be reported in ECB-2 form to DSIM.
7) Changes or Modification in ECB
Any changes in the terms and conditions of the ECB after obtaining LRN require prior approval
of RBI. The AD is allowed to approve the following requests from the ECB borrowers, subject to
certain conditions -
a) Changes/modifications in the drawdown/repayment schedule as discussed earlier
b) Changes in the currency of borrowing
c) Change of the AD
d) Changes in the name of the Borrower Company
e) Change in the recognized lender
f) Cancellation of LRN
g) Change in the end-use of ECB proceeds under the automatic route
h) Reduction in amount of ECB under the automatic route
i) Reduction in the all-in-cost of ECB
The conditions and reporting requirements in respect of each of the above change are available in
the Master Circular.

Trade Credits
Trade Credits refer to credits extended for imports directly by the overseas supplier, bank and
financial institution for maturity up to five years. Depending on the source of finance, such trade
credits include suppliers’ credit or buyers’ credit. Suppliers’ credit would mean credit for imports into
India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports
into India arranged by the importer from a bank or financial institution outside India.
1) Amount and Maturity:
a) Trade credits up to USD 20 million per import transaction for imports permissible under the
FTP with a maturity period up to one year from the date of shipment can be approved by the
AD banks.
b) For import of capital goods as classified under the FTP, the AD can approve trade credits up
to USD 20 million per import transaction with a maturity period of more than one year and up
to five years from the date of shipment.
c) No roll-over/extension can be permitted beyond the permissible period.
d) The ab-initio contract period should be six months for all trade credits.
e) The period of trade credit should be linked to the operating cycle and trade transaction.
2) All-in-cost Ceilings:
The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing
charges, out of pocket and legal expenses, if any. The existing all-in-cost ceilings are as under -
Maturity period Maximum margins over 6 months LIBOR for
respective currency or applicable benchmark
Up to 1 year
350 basis pointsMore than 1 year and up to 3 years
More than 3 years and up to 5 years
3) Guarantee:
AD banks are permitted to issue Letters of Credit/Guarantees/Letter of Undertaking (LoU) /Letter
of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20
million per transaction for a period up to one year for import of all non-capital goods (except
precious metals) and up to three years for import of capital goods, subject to prudential guidelines
issued by RBI from time to time.
The period of such Letters of credit, etc. has to be co-terminus with the period of credit, reckoned
from the date of shipment.
4) Reporting Arrangements:
Details of the trade credits and guarantee issued are required to be reported to RBI by the AD. No
reporting requirements are cast upon the borrower.
Borrowing and Lending in Rupees

FEMA 4 lays down various circumstances under which borrowing by residents and lending to non-
residents in rupees is permissible. Rupee denominated debt transactions are generally intended to be
entered into on a non-repatriation basis and therefore, most provisions of FEMA 4 do not permit
remittance of the amounts out of India. Additionally it mandates that any payment or repayment to the
non-resident party be made into their NRO accounts only, thereby, restricting the repatriability of the
funds.
1) Borrowing by Residents:
Regulation 4 of FEMA 4 permits a resident person, other than a company, to borrow in rupees
from a Non-Resident India (“NRI”) or a Person of Indian Origin (“PIO”) who is a non-resident,
on a non-repatriation basis. The conditions in this regard are –
a) Loan should be received through inward remittance from outside India or out of balances in
NRE / NRO / FCNR account of the lender in India,
b) Period of loan should not be more than 3 years,
c) Maximum rate of interest permitted is 2% over prevailing Bank rate, and
d) Repayment of the loan should be made into the NRO account of the lender.
The rupee borrowings cannot be used for any purpose other than the borrower’s business, not
being businesses where foreign investment is prohibited such as –
• Chit fund,
• Nidhi company,
• Agricultural, plantation, real estate business, construction of farm houses,
• Trading in transferable development rights.
On the same lines as FEMA 20, real estate business is explained to exclude development of
townships, construction of residential/ commercial premises, roads or bridges.
Also, the borrowed funds cannot be used for further investment into any company, partnership
firm, proprietary concern or any other entity or for re-lending except in cases where RBI has
permitted onlending or re-lending of such funds to the infrastructure sector or keeping the funds
in fixed deposits with banks, pending utilisation.
2) Lending to Non-Residents:
The AD is allowed to grant non-repatriable loans to a NRI as follows –
a) Against shares or other securities in the name of the borrower
b) Against immoveable property, other than agricultural or plantation property or farm house,
held by the borrower as per the extant regulations on immoveable property
c) For any purpose as per the loan policy of the AD as decided by the Board of Directors of the
AD.
In case of the above loans, the following conditions are required to be met –
(i) For points (a) and (b) above, the loan should be used for meeting the borrower’s personal
requirements or for his own business only,

(ii) The funds cannot be used for businesses mentioned above, where foreign investment is
prohibited,
(iii) The loan obtained under (c) above cannot be used for investment in capital market
including margin trading and derivatives,
(iv) The directives of RBI in respect of the respective category of advances should be
complied with,
(v) The loan amount cannot be credited to the NRE / FCNR account of the borrower,
(vi) Repayment of the loan should be made through inward remittances from outside India or
from NRO / NRE / FCNR account of the borrower or out of sale proceeds of the security
against which the loan was provided.
Further, ADs are permitted to lend to NRI employees of Indian companies for acquiring shares
under the ESOP scheme, subject to the following conditions –
(i) The ESOP scheme should be in line with the policy approved by Board of the AD,
(ii) The loan amount should be lower of 90% of the purchase value of the shares or Rs. 20
lakhs per employee,
(iii) The rate of interest and margin on loans should be as per the RBI’s directives,
(iv) The loan amount should be paid directly to the company,
(v) Repayment of the loan should be made through inward remittances from outside India or
from the NRO / NRE / FCNR account of the borrower,
(vi) These loans will be considered while calculating capital market exposure of the banks as
per prudential norms.
As per Regulation 7A, any relative of the borrower in India can repay any of the above loans by
transferring funds to the borrower’s loan account from his own bank account.
3) Housing Loan:
An AD or a housing finance institution in India approved by the NHB can provide a housing loan
to a NRI or PIO for purchase of residential property in India, provided –
a) The amount of loan, margin money and repayment period shall be as applicable to housing
loans provided to residents,
b) The loan amount shall not be credits to the NRE / FCNR account of the borrower,
c) The loan shall be fully secured by mortgage of the property and if required, by lien on the
borrower’s other asset in India,
d) Repayment of loan as well as other charges shall be paid through inward remittances or out of
NRE / FCNR / NRO account of the borrower or out of rental income derived from the
property in question or by any relative of the borrower in India by transferring funds to the
borrower’s loan account from his own bank account.
e) The rate of interest shall be as per the directives of RBI or NHB as the case may be.
4) Loan from Employer:

A body corporate registered or incorporated in India can give rupee loan to its NRI or PIO
employees, provided –
a) The loan is granted only for personal purposes including purchase of house property in India,
b) It should be as per the employer’s scheme for staff welfare or staff housing loan, as applicable
to its resident employees,
c) The loan funds should not be used for purposes restricted by Regulation 6,
d) The loan shall be paid into the borrower’s NRO account,
e) Repayment of the loan should be made through inward remittances or out of NRE / FCNR /
NRO account of the borrower only.
5) Loan from Relative:
A resident individual is permitted to grant an interest-free loan to a NRI relative on a non-
repatriable basis by way of crossed cheque / electronic transfer, subject to the following -
a) The minimum maturity of the loan is one year,
b) Loan amount is within overall limit under Liberalised Remittance Scheme (“LRS”),
c) The loan is utilised for meeting the borrower's personal requirements or for his own business
purposes in India other than prohibited business mentioned earlier,
d) The loan amount should be credited to the NRO account of the borrower,
e) Repayment of loan shall be made by way of inward remittances or out of NRO / NRE / FCNR
account of the borrower or out of the security against which such loan was granted.
FEMA 4 also provides for continuation of existing loans in the event of a resident borrower or lender
becoming non-resident subsequently. An AD may continue the loan given to a resident even after he
becomes a non-resident if it is satisfied about the reasons for its continuance, provided –
a) The period of the loan does not exceed the period fixed at time of granting the loan, and
b) Repayments made during the period that the borrower is a non-resident shall be made by way of
inward remittances or out of NRO / NRE / FCNR account of the borrower
Further, in the event of the lender of a rupee loan becoming non-resident, the repayment of the loan
should be made only to the NRO account of the lender.
Investment in other Securities by Non-residents
Regulation 5(4) along with Schedule 5 to FEMA 20 permits certain categories of non-residents to
purchase securities other than convertible debentures and shares of Indian companies. These include
investments in debt instruments also. The relevant provisions are given as under –
1) Purchase of other securities by NRIs
a) On non-repatriation basis
• Shares, convertible debentures and warrants issued by an Indian company can be
purchased without any limit. Consideration for the same should be paid by way of inward
remittance or out of funds held in NRE / FCNR(B) / NRO account.

• Dated Government securities, treasury bills, units of domestic mutual funds, units of
Money Market Mutual Funds can also be purchased without any limit.
• Investments in Small Savings Schemes including PPF are not permitted.
• The sale proceeds of investments made on a non-repatriation basis shall be credited to the
NRO account of the NRI.
• Since the investment is made on non-repatriation bases, the amount invested and the
capital appreciation thereon will not be allowed to be repatriated abroad.
• NRIs may also invest, both on repatriation and non-repatriation basis, in non-
convertible/redeemable preference shares or debentures11
.
b) On repatriation basis
A NRI can purchase, without limit, Government dated securities (other than bearer securities),
treasury bills, units of domestic mutual funds, bonds issued by a PSU in India and shares in
Public Sector Enterprises being disinvested by the Government, provided the purchase is as
per the terms and conditions of the notice inviting bids.
2) Indian Depository Receipts
Indian Depository Receipts (“IDRs”) can be issued in India by non resident companies subject to
application regulations under Company Law and SEBI. Residents in India as well as SEBI
registered Foreign Institutional Investors (“FIIs”)/Registered Foreign Portfolio Investors
(“RFPIs”) and NRIs can invest in these IDRs. Where IDRs are issued by financial / banking
companies having presence in India, prior approval of the concerned sectoral regulator should be
obtained.
a) The IDRs issued should be denominated in Indian Rupees.
b) In case of IDRs purchased by residents, FEMA regulations will not apply to purchase and
subsequent transfer arising out of transaction on a recognized stock exchange.
c) RFPIs, FIIs including SEBI approved sub-accounts of the FIIs and NRIs may invest,
purchase, hold and transfer IDRs subject to extant provisions of FEMA 20.
d) NRIs are allowed to invest in IDRs out of funds held in NRE / FCNR (B) accounts.
e) IDRs shall not be redeemable into underlying equity shares before the expiry of one year
period from the date of issue of the IDRs.
f) At the time of redemption / conversion of IDRs into underlying shares, the resident holders of
IDRs shall become investors in equity shares of a foreign company and thus, shall be required
to comply with the regulations on outbound investments contained in FEMA 120.
Accordingly, the following guidelines shall be followed –
• Listed Indian companies and Indian Mutual Funds, registered with SEBI may either sell
or continue to hold the underlying shares.
• Other resident persons including resident individuals are allowed to hold the underlying
shares only for the purpose of sale within 30 days from the date of conversion.
• FEMA provisions shall not be applicable to redemption of IDRs by the FIIs including
SEBI approved sub-accounts of the FIIs, RFPIs and NRIs.
11
A.P. (DIR Series) Circular No.140 dated June 6, 2014

g) The proceeds of issue of IDRs shall be immediately repatriated outside India.
3) Purchase of other securities by RFPIs, FIIs, QFIs and Long Term Investors
a) Permissible Investments -
RFPIs, FIIs, Qualified Foreign Investors (QFIs) and Long Term Investors can buy on
repatriation basis -
• Dated Government securities / treasury bills,
• Listed non-convertible debentures (“NCDs”)/ bonds,
• Commercial papers issued by Indian companies,
• Units of domestic mutual funds,
• NCDs/ bonds to be listed only if such listing is committed to be done within 15 days of
investment,
• Security receipts issued by Asset Reconstruction Companies (“ARC”) subject to –
i. The aggregate holding of all eligible investors shall not exceed 74% of paid up value
of each tranche of scheme / issue of Security Receipts issued by ARCs.
ii. Sub-accounts of FIIs are not allowed to invest in Security Receipts issued by ARCs.
• Perpetual Debt Instruments eligible for inclusion in Tier I capital and Debt capital
instruments as upper Tier II Capital issued by banks in India to augment their capital as
per the prevalent/approved market practice
• Non-convertible/redeemable preference shares or debentures.
b) Maximum Amount of Investment -
• Presently, maximum investment that can be made in Corporate Debt Instruments like
NCDs / bonds by all eligible investors is USD 51 billion.
• The eligible investors may invest in Commercial Paper up to a limit of USD 2 billion, but
within the overall limit of USD 51 billion.
• Eligible investors may also invest in the credit enhanced bonds up to USD 5 billion, but
within the overall limit of USD 51 billion.
4) Investment by Multilateral Development Banks
A Multilateral Development Bank (“MDB”) which is specifically permitted by the Government to
float rupee bonds in India can purchase Government dated securities.
5) Foreign Investment in Tier I and Tier II instruments issued by banks in India
a) SEBI registered FIIs and NRIs are permitted to subscribe to the Rupee denominated Perpetual
Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital instruments
(eligible for inclusion as upper Tier II capital), issued by banks in India, subject to the
following conditions –
• Aggregate investment by all FIIs should not exceed 49%, and investment by an individual
FII should not exceed 10% of each issue of Perpetual Debt instruments

• Aggregate investments by all NRIs should not exceed 24% of each issue and investments
by a single NRI should not exceed 5% of each issue of Perpetual Debt instruments
• Investment by FIIs in Debt Capital instruments shall be within the limits stipulated by
SEBI for FII investment in corporate debt instruments.
• Investment by NRIs in Debt Capital instruments shall be as per the extant policy for
investment by NRIs in other debt instruments.
b) The issue-wise details of the amount raised as Perpetual Debt Instruments are required to be
reported in the prescribed format within 30 days of the issue to the RBI.
c) The details of the secondary market sales / purchases by RFPIs, FIIs and the NRIs of these
instruments on the stock exchange are to be reported by the custodians and designated banks
respectively, to the RBI in Forms LEC (FII) and LEC (NRI).
6) Investment by QFIs in the units of Domestic Mutual funds
Non-resident investors (other than SEBI registered FIIs/FVCIs), who meet the KYC requirements
of SEBI, are permitted to purchase rupee denominated units of equity schemes of domestic
Mutual Funds (“MFs”) as QFIs, on repatriation basis, under two routes –
a) Direct Route – SEBI registered Qualified Depository Participant (“QDP”) route -
The QDP route is operated through single non-interest bearing Rupee account maintained by
the QFI with the AD, in which foreign inward remittances shall be received only in
permissible currency.
b) Indirect Route - Unit Confirmation Receipt (“UCR”) route –
In this route, Domestic MFs are allowed to open foreign currency accounts outside India for
the limited purpose of receiving subscriptions from QFIs and for redeeming the UCRs. The
UCRs are issued against units of domestic MF equity schemes.
7) Infrastructure Debt Funds (IDF)
a) SWFs, Multilateral Agencies, Pension Funds, Insurance Funds and Endowment Funds -
registered with SEBI, FIIs/RFPIs, NRIs, QFIs would be the eligible to invest, on repatriation
basis, in
• Rupee and Foreign currency denominated bonds issued by the IDFs set up as an Indian
company and registered as NBFCs with RBI
• Rupee denominated units issued by IDFs set up as SEBI registered domestic MFs
b) The facility of Foreign exchange hedging would be available to non-resident IDF investors,
IDFs as well as infrastructure project companies exposed to foreign exchange/ currency risk.
8) Purchase of other securities by QFIs
QFIs can invest -
a) Through SEBI registered QDPs in eligible corporate debt instruments, viz. listed NCDs or
bonds of Indian companies, listed units of MF debt Schemes and “to be listed” corporate
bonds directly from the issuer or through a registered stock broker on a recognized stock
exchange in India.

b) In case of non-listing of “to be listed” corporate bonds, the provisions relating to FIIs would
be applicable.
c) QFIs shall also be permitted to sell the eligible debt securities through registered stock broker
on a recognized stock exchange in India or by way of buyback or redemption by the issuer.
d) Security Receipts issued by ARCs provided that the total holding by an individual QFI shall
not exceed 10% and the aggregate holdings of all eligible investors put together shall not
exceed 49% of the paid up value of each tranche of scheme of Security Receipts.
e) Perpetual Debt instruments and Debt capital instruments issued by banks in India subject to
similar conditions as applicable to FIIs,
f) Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the
infrastructure sector
g) NCDs / bonds issued by NBFC-IFCs,
h) Credit enhanced bonds, and
i) Listed non-convertible/redeemable preference shares or debentures.
Conclusion
The RBI has traditionally adopted a very conservative approach towards debt investment into India
and had, therefore, put in place a host of regulations for monitoring the same. These regulations have
undergone several changes from time to time based on the needs of the economy and as financial
markets have evolved. However, violations of regulations pertaining to borrowing and lending are still
viewed stringently by RBI, inviting serious action. This makes it necessary to remain abreast of all the
changes in this arena.

Borrowing and Lending under FEMA

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