RESERVE BANK OF INDIA
EXCHANGE CONTROL DEPARTMENT
CENTRAL OFFICE
MUMBAI 400 001

January 8, 1999

A.D.(M.A. Series) Circular No.2 To,

All Authorised Dealers in Foreign Exchange

Dear Sirs,

Foreign Direct Investment - Inflow
details - Further liberalisation

Attention of the authorised dealers is drawn to paragraph 10B.2(i) & (iii) of the Exchange Control Manual, regarding grant of general permission to Indian companies for issue and export of shares to their non-resident shareholders in certain cases. One of the conditions subject to which the general permissions are granted is that the company concerned should file a declaration together with the required documents to the concerned Regional Office of Reserve Bank within 30 days from the date of issue of shares to foreign investors.

2. With a view to monitoring and compiling data on inflow of funds for investment in India Reserve Bank has vide its Notifications No.F.E.R.A.188 & 189/98-RB dated 11th November 1998 (copies enclosed) amended its earlier Notifications dated 13th January and 10th February 1998. Accordingly, Indian companies receiving funds from foreign investors in accordance with the general permissions granted by Reserve Bank are required to furnish to the Regional Office of Reserve Bank a report within 30 days form the date of receipt of remittance containing the following particulars.

a) Name/s of the foreign investor/s;
b) Country of residence or incorporation of the foreign investor/s;
c) Amount and date of receipt of remittance and its rupee equivalent;
d) Name and address of the authorised dealer in India through whom the remittance has been received;
e) In case where the investment has been approved by SIA/FIPB, the number and date of such approval.

This requirement is in addition to the submission of the prescribed declaration in form FC (RBI)/ISD(R)/ISD, as the case may be, alongwith the documents, within 30 days form the date of issue of shares.

3. As a measure of further liberalisation, Reserve Bank has vide its Notification No.FERA.188/98-RB dated 11th November 1998 referred to above extended the general permission granted vide its Notification No.FERA.180/98-RB dated 13th January 1998, to -

i) issue of equity upto 100% to foreign investors in respect of items included in Part 'D' of Annexure III list as per Ministry of Industry Press Note No.2 dated June 13, 1998, (copy enclosed) provided the foreign equity does not exceed Rs.1,500 crores in the project,

ii) issue of preference shares to foreign investors under the 'Automatic Route of Reserve Bank',

iii) issue of preference shares to Non-residents/Overseas Corporate Bodies under 100% Scheme.Accordingly, it will be in order for the Indian companies to issue preference shares also to their non-resident investors to the extent of the prescribed percentages i.e. 50%/51%/74%/100%, as the case may be, subject to the following terms and conditions as prescribed by the Government of India.

a) Where preference shares carry a conversion option, such issue of preference shares shall be treated as foreign direct investment for purposes of sectoral caps on foreign equity. However, without such conversion option, they would fall outside the foreign direct equity cap. The companies issuing convertible preference shares, therefore, will have to ensure that after the conversion, the foreign equity level will not exceed the prescribed ceilings under the "Automatic Route of RBI", i.e. 50%/51%/74%/100%, as the case may be.

b) The issue of preference shares will continue to conform to the guidelines/statutory requirements issued by Reserve Bank/SEBI and other statutory requriements.

c) The rate of dividend shall not exceed 300 basis points over the SBI Prime Lending Rate prevailing on the date of the Board Meeting in which issue of preference shares is recommended.

d) The maximum time limit for redemption/conversion of preference shares, as prescribed under the Company Law or as agreed between the parties, whichever is earlier, shall be observed.

e) The valuation procedure for convertible equity, should conform to SEBI/Reserve Bank guidelines.

4. The following consequential amendments may be carried out in the Exchange Control Manual.

Volume I

i) Existing sub-paragraph (i) of paragraph 10B.2 may be substituted as per slip 1.
ii) New paragraph 10A.9 may be inserted after the existing paragraph 10A.8 as per slip 2 and its entry made in Index of Chapter 10.

Volume II

In Appendix III, under Section 19, Notifications No.F.E.R.A.180/98-RB dated 13th January 1998 and F.E.R.A.182/98-RB dated 10th February 1998 may be replaced by the Notifications as amended upto 11th November 1998 as per slips 3 and 4 respectively.

5. Authorised dealers may bring the contents of this circular to the notice of their constituents concerned.

6. The directions contained in this circular have been issued under Section 73(3) of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any contravention or non-observance thereof is subject to the penalties prescribed under the Act.

Yours faithfully,
B. MAHESHWARAN
Chief General Manager

Slip1
[AD/MA /1998]
Investment in Shares by Foreign Collaborators

10B.2(i) As per the Foreign Investment guidelines issued by the Government of India, Ministry of Industry, foreign investment (equity/preference shares) upto certain specified limits would be permitted by Reserve Bank under Automatic Route as under:

(a) Foreign investment (equity/preference) upto 50% in respect of Mining activities referred to in Part 'A' of Annexure III to Ministry of Industry's Press Note No.14 (1997 Series) dated 8th October 1997;

(b) Foreign investment (equity/preference) upto 51% in (i) industries/items included in part 'B' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997 and (ii) a trading company primarily engaged in export activity;

(c) Foreign investment (equity/preference) upto 74% in industries/items included in part 'C' of Annexure III to Ministry of Industry's Press Note No.14 (1997 series) dated 8th October 1997;

(d) Foreign investment (equity/preference) upto 100% in projects for electric generation, transmission and distribution as included in Part ‘D’ of Annexure III list published vide Ministry of Industry’s Press Note No.2 dated 13th June 1998, provided the foreign equity in such projects does not exceed Rs.1500 crores.

Existing Indian companies are also permitted to raise foreign investment (equity/preference) to the level permissible as indicated above under the Automatic Route in case the company is engaged in the manufacture of item/s included in the Annexure III industries or the proposed expansion of capital is for undertaking an activity covered under the said Annexure. Raising of foreign investment (equity/preference) upto 51% in an existing trading company [cf. sub-paragraph 10B.,2(i)(b)(i) above] will be permitted if the company has already been registered as Export/Trading/Star Trading House.

Reserve Bank, vide its Notifications No.F.E.R.A.180/98-RB dated 13th January 1998 as amended by Notification No.F.E.R.A.188/98-RB dated 11th November 1998 has granted general permission under Sections 19(1) (a), 19(1)(d) and 29(1)(b) of Foreign Exchange Regulation Act, 1973 to Indian companies for issue and export of equity/preference shares to foreign investors in respect of eligible investments under the Automatic Route. As a result of the general permission, Indian companies seeking foreign investment (equity/preference) under the Automatic Route of Reserve Bank and satisfying the conditions laid down in the said Notifications will not require prior clearance of Reserve Bank. Such Indian companies may issue shares to foreign investors and file a declaration in form FC(RBI) together with the required documents with the concerned Regional Office of Reserve Bank under whose jurisdiction their registered office is situated, within 30 days from the date of issue of shares to foreign investors/collaborators. Accordingly, non-residents who have been issued shares under the general permission granted by this Notification would not need specific approval under Section 29(1)(b) of FERA 1973 from Reserve Bank.

Issue of preference shares to Non-Resident Indians/Overseas Corporate Bodies is also permitted under 100% Scheme.

Notification No.F.E.R.A.188/98 RB dated 11th November 1998

In pursuance of clause (a) and clause (d) of sub-section (1) of section 19 read with clause (b) of sub-section (1) of section 29 of the Foreign Exchange Regulation Act, 1973 (46 of 1973), the Reserve Bank directs that its notification No.FERA 180/98 RB dated 13th January 1998 as amended from time to time (hereinafter referred to as "the said Notification’), shall be amended in the following manner, namely:

i) in the said Notification, for the words ‘equity shares’ or ‘equity capital’ wherever they occur, the words ‘shares’ or ‘capital’, shall be substituted.

ii) in paragraph 3 of the said Notification,

(a) for clause (i), the following clause shall be substituted, namely:-
(i) the foreign investment shall not in aggregate exceed 50%, 51%, 74% or 100% of the capital of the issuer company, an indicated in the said Annexure III;

Provided that in respect of the activity of generation and transmission of electric energy (being electric energy produced in hydro-electric power plants, coal/lignite based thermal power plants, oil based thermal power plants and gas based thermal power plants) the capital by way of foreign investment shall not exceed Rs.1500 crores;

Provided further that for the purpose of reckoning the extent of foreign investment under this clause, preference shares carrying a conversion option, shall be included".

(b) after clause (iii), the following clause shall be added, namely:-

(iii)(a) in the case of issue of convertible equity shares, the valuation procedure shall conform to the guidelines issued by the Bank or SEBI, as the case may be;"

(c) in clause (iv), after the words ‘required for the project’, the words ‘or for issue of shares’, shall be inserted.

(d) after clause (v), the following clause shall be added, namely -

(v)(a) the rate of dividend payable in respect of preference shares shall not exceed SBI Prime Lending Rate (prevailing on the date of the Board meeting in which issue of shares is recommended) plus 300 basis points".

(e) after clause (vii), the following clause shall be inserted, namely:-

(vii a) the issuer company files with the Regional Office of Reserve Bank, not later than 30 days from the date of receipt of remittance, a report containing the following -

(a) Name of the foreign investor;
(b) Country of residence or incorporation of the foreign investor;
(c) Date of receipt of remittance and its rupee equivalent;
(d) Name and address of the authorised dealer in India through whom the remittance is received.
Notification No.F.E.R.A.189/98 RB dated 11th November 1998

In pursuance of clause (a) and clause (d) of sub-section (1) of Section 19 read with clause (b) of sub-section (1) section 29 of the Foreign Exchange Regulation Act, 1973 (46 of 1973), the Reserve Bank directs that its notification No.F.E.R.A.182/98 RB dated 10th February 1998 as amended from time to time (hereinafter referred to as "the said Notification"), shall be amended in the following manner, namely:-

(1) in the said Notification, in paragraph 2, after clause (v), the following clause shall be added, namely:-
(v a) the issuer company files with the Regional Office of Reserve Bank, not later than 30 days form the date of receipt of remittance, a report containing the following -

(a) Name of the foreign investor;
(b) Country of residence or incorporation of the foreign investor;
(c) Date of receipt of remittance and its rupee equivalent;
(d) Name and address of the authorised dealer in India through whom the remittance is received;
(e) Number and date of SIA/FIPB approval in respect of which remittance is received.

Slip 2
[AD/MA/2/1999]

Reporting of investment inflows

10A.9 Reserve Bank has granted general permission under Sections 19(1)(d), 19(1)(a) and 29(1)(b) of the Foreign Exchange Regulation Act, 1973 to Indian companies for issue and exports of shares/securities to non-resident investors, and to non-resident investor to acquire shares/securities of Indian companies under various non-resident direct investment schemes. In terms of Reserve Bank Notification Nos.FERA 188 and 189/RB-98 dated 11th November 1998 it is obligatory on the part of Indian companies seeking non-resident investment to file a report containing the following particulars with the Regional Office of Reserve Bank not later than 30 days from the date of receipt of remittance.

(a) Name of the foreign investor:
(b) Country of residents or incorporation of the foreign investor;
(c) Date of receipt of remittance and its rupee equivalent;
(d) Name and address of the authorised dealer in India through whom the remittance is received;
(e) Number and date of SIA/FIPB approval in respect of which remittance is received.

This requirement is in addition to the submission of the prescribed declaration in form FC(RBI)/ISD(R)/ISD, as the case may be, alongwith the documents, within 30 days form the date of issue of shares.

Government of India
Ministry of Industry
Department of Industrial Policy and Promotion
(Industrial Policy Division)

Udyog Bhavan, New Delhi
dated the 13th June, 1998
PRESS NOTE NO.2
(1998 SERIES)

Under the present policy, Indian companies undertaking generation and transmission of electric energy, produced in hydro-electric power plants, coal based power plants, oil based thermal power plants and gas based thermal power plants are eligible for automatic approval up to 74% foreign equity.

2. The Government has reviewed the existing guidelines for automatic approval for foreign equity for electric generation, transmission and distribution projects, and has decided to enlarge the provisions for automatic approval for such projects. Accordingly, projects for electric generation, transmission and distribution will be permitted foreign equity participation up to 100% on the automatic approval route provided the foreign equity in any such project does not exceed Rs.1500 crore. The categories which would qualify for such automatic approval are:

(i) Hydro-electric power plants.
(ii) Coal/lignite based thermal power plants.
(iii) Oil based thermal power plants.
(iv) Gas based thermal power plants.

3. It is clarified that the facility for automatic approval as enumerated in paragraph 2 above, does not include generation, transmission and distribution of electric energy produced in atomic reactor power plants and hence such proposals shall not qualify for automatic approval by RBI under this Press Note.

4. The provisions referred in para 2 above would be listed under the heading Part-"D" of Annexure-III as appended to this Press Note as a substitution of the existing entry No.C-4 in Part-"C" of Annexure-III.

5. The list appended to this Press Note is based on the National Industrial Classification of all Economic Activities (NIC), 1987. The entrepreneurs/investors are advised to give the description of their activity under this classification system when submitting their applications to the RBI.

6. All other terms and conditions as notified under Press Note No.2(1997 series) dated the 17th January, 1997 and Press Note No.14(1997 series) dated the 8th October, 1997 remain unchanged.

Sd/-
(Ashok Kumar)
Joint Secretary to the Government of India