Problems relating to Trade and Investment on India
13. Finance |
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Issue |
Issue details |
Requests |
Reference |
| (1) Restricted Interest On Intra-Group- Company Loan | - Our member firm contemplates organising, in future, a group financing among its subsidiaries incorporated in India (MFSs). However, it is highly likely that "deemed dividend tax" accrues on the capital loan amount or on its interest. - Inter-group cross-border both borrowing and depositing iares not possible by regulation, frustrating the effective inter-group intra-company cash management. |
- It is requested that Reserve Bank of India (RBI) and Competent Taxation Authority together make necessary adjustment to make it clear that such intra-group financing is non-taxable. - It is requested that RBI deregulates the restrictions. |
- RBI Regulations - Republic Bank of India - Tax Law |
| (2) Regulated External Commercial Borrowing (ECB) | - RBI rigorously controls fund procurement from overseas (on borrowing/financing/capital increase, etc.). Moreover, RBI severely restricts the fund usage (for operational fund or for equipment fund, each with the respective different terms of financing); the restricted borrowing periods (minimum 7-years for borrowing the operational fund from overseas); the restricted repayment methods (disallowed repayment from the borrowed fund); and restricted capital reduction (the court's approval is necessary for the sake of protecting creditors). - A member firm, anxious to respond to the desire for increasing operational fund of its distribution subsidiary in India (from its headquarters or its related operation outside India) is unable to do so, because, the purpose of such fund deployment is restricted to capital investment, especially in infrastructure. => In September 2013, deregulation took place. It allows application of such fund as operational fund. However, in substance, it is practically unfeasible due to the stringent attached conditions. (Main Attached Conditions): -- average loan period is 7-years, while repayment before the due date is disallowed. -- lender's direct capital contribution into borrower exceeds 25%. - Deregulation was decided in FY 2013 to deregulate conditionally ECB loan. However, the attached conditions are extremely stringent so that further deregulation is desirable: (1) 7-year freeze on repayment of Original Principal (OP). (2) The scope of fund application is restricted to parent-subsidiary loan. |
- It is requested that RBI removes the restrictions on intended purposes, term and repayment/capital reduction by propelling deregulation. - It is requested that GOI further deregulates or repeals restrictions on fund procurement from overseas. - It is requested that RBI further deregulates the ECB terms to maximize the effective fund deployment: (1) reduction of the 7-year freeze on repayment to 1-year freeze, etc., and (2) broadening the scope of ECB to the 3rd generation local companies. |
- RBI Regulations - Policy Guidelines on ECB (External Commercial Borrowing) |
| (Action) - In India, all External Commercial Borrowings (ECBs) are subject to the Commercial Borrowing Control, regardless of the borrowing size, large or small. The Guidelines RBI issues in each year provides the full details of ECB in regard to the Fund Usage, the Borrowing Term, Interest Rates, etc. - ECB Policy provides that ECB includes borrowings from an overseas' parent by its local subsidiary and installments for cost of imports three years after shipment. - External commercial borrowings (ECB) is divided into two categories, automatic route (for which no prior approval of RBI is required) and approval route (for which RBI's prior approval is required). Automatic route is conditioned upon: the amount and the period of the loan (up to US$20 million 3-5 years, over US$20 million less than 500 million, over five years in average); the purpose of the fund utility (investment into agricultural field, purchase of state-owned shares in state-owned enterprises in the process of privatization, direct investment overseas); interests; and expenses. - Under the Review of ECB Policy of August 2007, RBI prohibits bringing into India of the proceeds from ECB for more than US$20 million. By external borrowing policy: liberalisation of 29 May 2008, this cap was raised to US$50 million (or US$100 million in case of investment into infrastructure). - In August 2007, in order to suppress rapid appreciation of rupees and inflation, RBI set the limit of US$20 million on ECB for permissible domestic end-uses subject to RBI's prior approval, while requiring borrowers raising more than USD 20 million under ECB to park overseas the ECB fund, which must be expended in foreign currency. - On 3 January 2008, RBI and Bank of Japan (BOJ) signed a bilateral swap arrangement (BSA) with a view to overcome short-term liquidity problems. BSA enables both countries to swap their currencies - the Japanese yen or the Indian rupee - against the US dollar up to US$3 billion. - On 9 December 2009, Reserve Bank of India (RBI) released Notification, reviewing its External Commercial Borrowings (ECB) Policy. By this Notification, RBI reinstated the all-in-cost ceilings under the approval route for the ECBs, and discontinued the facility for buyback of the foreign currency convertible bonds (FCCBs) (with effect from 1 January 2010). RBI also extended ECB until 31 December 2009 for corporations, engaged in the development of integrated township. RBI further permitted eligible borrowers in the telecommunication sector to avail of ECB under the automatic route. - While GOI has gradually deregulated restrictions on external commercial borrowing (ECB), the tight control persists on foreign currency restrictions. |
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| (Improvement) - On 4 December 2006, RBI issued A.P. (DIR Series) Circular No.17, liberalising regulation on the use of external commercial borrowings (ECB) by Indian corporations. Under the existing regulation, corporations can avail ECB up to US$20 million minimum average maturity period of 3 years and up to US$500 million during a financial year with the minimum average maturity period of 5 years, both under automatic route. Pursuant to Circular No.17 that has modified the Regulation, corporations can avail ECB of an additional amount of US$250 million with average maturity of more than 10 years under the automatic approval route, over and above the existing limit of US$500 million under the automatic route during a financial year. Other ECB criteria such as end-use, all-in-cost ceiling, recognised lender, etc. need to be complied with. Circular No.17 authorises AD category - I banks, without requiring RBI's advance approval, prepayment of ECB up to US$300 million, as against the existing limit of US$200 million Bank, subject to compliance with the minimum average maturity period as applicable to the loan. - On 30 April 2007, RBI issued Circular No.44 to amend its annual policy on external commercial borrowings (ECB). By this amendment, the existing limit for prepayment of ECB has been increased from US$300 million to US$400 million. Accordingly, AD Category - I banks may allow prepayment of ECB up to US$400 million without RBI's prior approval. - On 29 May 2008, RBI deregulated ECB, under the climate of the depreciating rupees, by raising the cap on the loan amount from US$30 million to US$50 million in principle (and up to US$100 million for investment into infrastructure), while raising the cap on the interest rate also with the view to stimulate the domestic investment, to maintain the high growth rate, and to promote the infrastructure improvements. - On 22 September 2008, Reserve Bank of India (RBI) promulgated (and enforced on the same date) Circular No. 16, raising the existing limit of USD 100 million to USD 500 million per financial year for the borrowers in the infrastructure sector for Rupee expenditure as regards External Commercial Borrowings (ECB). ECBs in excess of USD 100 million for Rupee expenditure should have a minimum average maturity period of 7 years. The all-in-cost ceilings for ECBs as modified by Circular No. 16 are as follows: Average Maturity Period -------------------- All-in-Cost ceiling over 6 Months LIBOR(Note) --------------------------------------------------------- Existing ---------------- Revised Three years and up to five years ------------------ 200 basis points ---- 200 basis points More than five years and up to seven years ----- 350 basis points ---- 350 basis points More than seven years ----------------------------- 350 basis points ---- 450 basis points (Note) for the respective currency of borrowing or applicable benchmark - On 1 July 2013, Reserve Bank of India (RBI, India's Central Bank) promulgated Notification RBI/2013-14/12, which approves external commercial borrowing (ECB) via the GOI Approval Route. - On 30 March 2016, RBI released External Commercial Borrowings (ECB) - revised framework, cutting down the minimum average maturity period from 10 years to 5 years. (RBI/2015-16/349, A.P.(DIR Series) Circular No.56) |
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