Sunday, September 27, 2015

RBI Circular on Payment Gateways

[The following guest post is contributed by Jitendra Soni, who is an associate at AZB & Partners in Noida. Views are personal]

The Reserve Bank of India ("RBI") has recently issued a fresh circular in an attempt to facilitate cross-border e-commerce transactions, which can be accessed here (“Circular”). Prior to this Circular, the authorized banks were permitted to offer the facility to repatriate only export related remittances by entering into standing arrangements with Online Payment Gateway Service Providers (“OPGSPs”) in respect of such export of goods and services. This Circular takes a step ahead by permitting the authorized banks to offer a similar facility for imports transactions. Some of the key guidelines as laid down in this Circular are highlighted below for ease of reference:


AD Category-I banks should report the details of each of their arrangements with OPGSPs, as and when entered into, to the RBI and should take all steps as laid down in the Circular for operationalizing such arrangement, namely, carrying out due diligence of the OPGSPs, maintenance of separate export and import collection accounts in India for each OPGSP, etc.

Foreign entities which are desirous of operating as OPGSP are required to open a liaison office in India with the prior approval of the RBI. The Circular also prescribe the duties of such OPGSPs for operationalizing such arrangement, namely, ensuring compliance with Information Technology Act, 2000 and all other laws in India, placing mechanism for resolution of disputes and redressal of complaints, etc.

Indian entities functioning as intermediaries for electronic payment transactions, which are desirous of undertaking cross border transactions, are required to maintain separate accounts for domestic and cross border transactions.

Import Transactions

Only the import of goods and software (as permitted under the prevalent Foreign Trade Policy) whose value does not exceed USD 2,000 are eligible to avail this facility.

Immediately upon receipt of funds from the importer and in no event, later than two (2) days from the date of credit to the collection account, the sale / import proceeds in the import collection account is required to be remitted to the respective overseas exporter’s bank account.

The permitted debits and credits in and from the OPGSP import collection account are as follows:
Permitted Debits
Permitted Credits
Collection from Indian importers for online purchases from overseas exporters electronically (through credit/debit card, etc.)
Payment to overseas exporters in permitted foreign currency.
Charge back from the overseas exporters
Payment to Indian importers for returns and refunds.

Payment of commission at rates/frequencies as defined under the contract to the current account of OPSGP.

Bank charges
Export Transactions

The framework governing the export payment transactions remains largely as was prescribed in the earlier circulars issued by the RBI, namely, Circular No. 109 dated June 11, 2013 (accessible here) and Circular No. 17 dated November 16, 2010 (accessible here).

Only the exports of goods and services (as permitted under the prevalent Foreign Trade Policy) whose value does not exceed USD 10,000 are eligible to avail this facility.

The permitted debits and credits from the OPGSP export collection account are as follows:
Permitted Debits
Permitted Credits
Payment to respective Indian exporters’ accounts.
Repatriation from the NOSTRO collection account, electronically.
Payment of commission at rates/frequencies as defined under the contract to the current account of OPSGP.

Charge back to the overseas importer where the Indian exporter has failed to discharge his obligations under the sale contract.

Implications of this Circular

One of the concerns which remained unaddressed prior to this Circular was that companies operating in the ecommerce space were not specifically permitted by the RBI to remit sales proceeds directly to the bank account of the overseas merchant for import of goods made by such merchants. This Circular perhaps marks a way forward in rationalizing the regulatory framework pertaining to processing and remittance of import related payments to the overseas merchants.

On a practical note and going forward, in the context of advising online marketplaces in India, which have overseas merchants listed on their websites, this Circular will form the basis of advice that such marketplaces can appoint OPGSPs to facilitate the import related payment to the overseas bank account of such merchants. 

- Jitendra Soni

Saturday, September 26, 2015

SEBI Denied Locus Over Scheme of Arrangement

It is a well-known fact that schemes of arrangement are a popular method to implement mergers and corporate restructuring transactions in India. While they involves an elaborate and cumbersome procedure and the oversight of the court, parties enjoy tremendous flexibility in structuring their transactions. More importantly, such a scheme is binding on the dissenting minority. When this involves listed companies, it is obvious that the Securities and Exchange Board of India (SEBI) as well as the stock exchanges would take on an important role in determining the outcome of the scheme, and particularly in ensuring that shareholder interest is not adversely affected. However, the role of SEBI and the stock exchanges in such schemes has been tenuous. Courts have kept them away from the purview of schemes of arrangement that are essentially driven through the courts under the Companies Act. While SEBI has sought to encroach upon the scheme territory through amendments to the listing agreement introduced in 2003 and through two circulars issued in 2013, the position remains unclear. Its attempt to establish jurisdiction over a scheme of arrangement more recently resulted in a lack of success before the Bombay High Court this month.

Before dealing with the recent ruling, a discussion of the previous position would be in order. The question of SEBI’s jurisdiction over a scheme of arrangement came up for the first time in Securities and Exchange Board of India v. Sterlite Industries Ltd., (MANU/MH/0339/2002). When SEBI appealed against a scheme of arrangement and reduction of capital, a division bench of the Bombay High Court refused to recognise any power of SEBI in representing itself before the court (a power that it sought to undertake with a view to safeguarding the interest of the investors).

Deprived of any role in such schemes, SEBI followed a somewhat unusual method to exert itself by imposing a role for the stock exchanges in a scheme. It amended the listing agreement in May 2003, by which companies have been required to file any scheme of arrangement with the stock exchanges at least one month before filing it with any court or tribunal for approval.[1] This is to ensure that stock exchanges have the opportunity to examine whether the scheme violates any provisions of the securities laws or stock exchange requirements. This power has indeed been exercised by the stock exchanges. For example, in Re Elpro International Ltd. ([2009] 149 Comp. Cas. 646), although the Bombay Stock Exchange (BSE) did not approve a scheme of reduction of capital when the parties filed with it, the Bombay High Court sanctioned the scheme but with liberty to the stock exchanges to pursue their rights under the listing agreement. Given BSE’s refusal to approve the scheme, the company decided not to pursue the arrangement. In that sense, the amendment to the listing agreement giving power to the stock exchanges has had an indirect deterrent effect.

A decade after the introduction of clause 24(f) to the listing agreement, SEBI issued two circulars (here and here) in 2013 not only strengthening the powers of the stock exchanges in evaluating schemes of arrangement, but also in giving SEBI itself the opportunity to review schemes. The downside of these additional powers (and that of clause 24(f) of the listing agreement is that they only enable SEBI and the stock exchanges to provide comments on the scheme. If they decide not to approve the scheme, the consequences thereof are unclear. If, for instance, a company decides to proceed nevertheless and seek the approval of the court, at most SEBI and the stock exchanges may make their representations before the court. They appear to have no veto powers over the scheme.

It is in this regulatory backdrop that the Bombay High Court in Securities and Exchange Board of India v. Ikisan Limited was required to consider SEBI’s locus in seeking a review of a scheme of arrangement that was already sanctioned by the court. This judgment by Justice S.J. Kathawalla issued on September 23, 2015 in Company Application No. 124 of 2013 in Company Scheme Petition No. 234 of 2011 is also accessible through the Bombay High Court website ( .


The litigation relates to two related schemes of arrangement filed by a group of companies. The first scheme, implemented in 2010, involved an amalgamation of one company into another. The second, implemented in 2011, and involving the previously amalgamated company and other companies related to a complex restructuring. The details of the schemes are not only somewhat complicated, but they are unnecessary for the present discussion.

The record indicated that when the second scheme was pending before the Bombay High Court, SEBI received a complaint from a shareholder regarding some deficiencies in the nature of the scheme. SEBI forwarded the complaint to BSE, but no action was taken. It is also the case that the BSE did not raise any objections when the scheme was filed with it pursuant to clause 24(f) of the listing agreement. In the meanwhile, the Bombay High Court provided its sanction to the scheme, which was duly implemented. It was only subsequently that SEBI approached the Bombay High Court for a review of the scheme on account of various deficiencies, and on the ground that the scheme therefore did not comply with the relevant legal requirements for sanction. Although the judgment of the court refers to the various details of the scheme, this post is limited to the discussion pertaining to SEBI locus standi in seeking a review of a scheme under sections 391 to 394 of the Companies Act, 1956.

For the major part, the Bombay High Court relied on its previous division bench judgment in Sterlite Industries (discussed above). As decided in that case, SEBI did not have the locus standi to challenge a scheme under the Companies Act. Although the Sterlite Industries decision went on appeal to the Supreme Court, it refused to interfere in the matter and left the substantive issues open. Accordingly, in this case the court found no reason to doubt the binding nature of Sterlite Industries. Although SEBI sought to exercise its wide scope of powers that were recognised by the Supreme Court in Sahara India Real Estate Corporation Ltd. v. SEBI ((2013) 1 SCC 1), it was not found to have overruled the decision in Sterlite Industries.

The court also found that there was substantial delay in SEBI’s action in bringing the application for review. Although the scheme was sanctioned in 2011 and further complaints from shareholders followed soon thereafter, SEBI acted only in 2013. In any event, given the grave nature of the allegations brought by SEBI, the court decided to delve into the merits of the case. But, here too, the court did not find reason to overturn its earlier order sanctioning the scheme. Hence, SEBI’s application was dismissed.


This effort represents another instance in SEBI’s continued efforts to seek meaningful intervention in schemes of arrangement, but without success. It continues to bear the adverse consequences of the ruling in Sterlite Industries. Unless a different outcome ensues from the Supreme Court, significant change is unlikely. The unintended consequences of this approach is that it provides parties with the option of embarking upon a scheme of arrangement in order to sidestep SEBI’s oversight, potentially leading to a regulatory arbitrage. As I have previously mentioned, schemes of arrangement do provide sufficient flexibilities to parties to undertake various types of restructuring transactions that may not necessarily be in the interests of the minority shareholders. This may deprive such shareholders of regulatory supervision.

At the same time, it is not all gloom and doom for the regulator and the minority shareholders. The present case arose in 2011, i.e. prior to SEBI’s issuance of circulars in 2013 granting it (and the stock exchanges) greater oversight over schemes of arrangements. Cases subsequent to the issue of the circulars would be subject to a more stringent regime, although this remains untested.

More importantly, this case as well as Sterlite Industries hinge on the timing of SEBI’s intervention. In both those cases, SEBI stirred into action after the court had already sanctioned the scheme. It either exercised the powers of appeal or review. Conversely, if SEBI had approached the court during the hearing stage (and prior to the sanction of the scheme), the outcome may have been different. It may not be possible in such a situation for the court to refuse to hear SEBI’s objections to the scheme.

Going forward, the situation is clearer. Under the Companies Act, 2013, the notice of the scheme is required to be sent by the company to various authorities, including SEBI (section 230(5)), who are entitled to make representations before the court. Hence, SEBI’s right of audience before the court is explicit. Of course, this provision is yet to come into force, due to which SEBI will be compelled to navigate through the current system in the near future. The bottom-line from SEBI’s perspective appears to be: raise objections to the scheme before the court sanctions it, or never.

[1] Listing Agreement, clause 24(f).

The Satyam Case: Insider Trading and Pledge

[The following guest post is contributed by Shashank Prabhakar, a Senior Associate with Finsec Law Advisors. These are the author’s personal views]

The Whole Time Member of SEBI (‘WTM’) recently passed an order against certain relatives of Mr. Ramalinga Raju and entities belonging to the promoter group of Satyam Computers for violation of Section 12A of the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’), Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (‘PFUTP Regulations’) and Regulation 3 of the SEBI (Prevention of Insider Trading) Regulations, 1992 (‘PIT Regulations’). The order was passed under Section 11(1), 11(4) and 11(B) of the SEBI Act.

One of the entities against whom the order was passed is SRSR Holdings Pvt. Ltd., a holding company, which owned almost all of the shares held by the promoter group of Satyam (SRSR Holdings held 8.27% of the total shareholding of Satyam while the total shareholding of the promoter / promoter group of Satyam was about 8.6%). The shareholders of SRSR Holdings were Mr. Ramalinga Raju, his brother Mr. Rama Raju and their respective spouses. I propose to analyze only that part of the order which deals with SRSR Holdings.

The facts are that during the period between August 2007 and November 2008, various promoter group entities of Satyam had taken loans amounting to Rs. 1,258 crores from financial institutions and SRSR Holdings had pledged the shares of Satyam on their behalf as security for the loans. The weighted average price at which the shares were pledged was Rs. 402.80 and most of the lenders required the borrowers to pledge about 2.25 times the value of the loan as security. The lenders started invoking the pledge between December 23, 2008 and January 7, 2009, on account of shortfall in the margins. It may be recalled that Mr. Ramalinga Raju issued the infamous letter disclosing financial irregularities in Satyam on January 7, 2009.

SEBI issued a notice to SRSR Holdings asking it to show cause as to why action should not be taken against it under Section 12A of the SEBI Act read with Regulation 3 of the PIT Regulations. SEBI alleged that SRSR Holdings had pledged shares of Satyam when it had full knowledge of the ongoing financial irregularities in Satyam and that these shares were pledged to obtain funds for the personal benefit of promoters / directors of Satyam and entities connected to them. This, according to SEBI, amounted to insider trading under the PIT Regulations. SRSR Holdings in its reply claimed that it was not an “insider” as per the definition under the PIT Regulations. SRSR Holdings claimed that it had no “unpublished price sensitive information” or in other words, that it did not have any knowledge about financial irregularities in Satyam. Although Mr. Ramalinga Raju and Mr. Rama Raju were both directors in the company, it claimed that their personal knowledge of financial irregularities in Satyam could not be attributed to the company. Further, the company argued that in any case pledging of shares did not amount to “dealing in securities” under the PIT Regulations and for that reason Regulation 3 of the PIT Regulations was not violated in this case.[1]

The WTM in his order disregarded the claims made by SRSR Holdings and held that it was a “person deemed to be a connected person” under Regulation 2(h)(i) of the PIT Regulations as Mr. Ramalinga Raju and Mr. Rama Raju, who were chairman and managing director of Satyam respectively, were also directors of SRSR Holdings. Therefore, SRSR Holdings was held to be an “insider” as they were both under same management, as per Regulation 2(e)(i) of the PIT Regulations.

As regards the claim that personal knowledge of the directors could be attributed to the company, it was held that since the shares could not have been pledged without the active connivance of Mr. Ramalinga Raju and Mr. Rama Raju who were in involved in and were fully aware of the financial irregularities in Satyam, SRSR Holdings was very much in possession of UPSI when the shares were pledged. The WTM does not provide any other reasons for arriving at this conclusion nor does he cite any authority in support of his conclusion.

Further, the WTM also held that pledging of shares amounted to “dealing in securities” under the PIT Regulations. Regulation 2(d) of the PIT Regulations defines the phrase to mean “an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent”. [Emphasis Supplied] The circular definition notwithstanding, the WTM concluded that from the plain reading of the definition it was clear that the phrase would include “all commercial dealings related to the securities which involve transfer of securities or any rights or interests therein or issuance of securities.” He also held that the mode of transfer is immaterial for the dealings to fall within the ambit of this definition. No further authority has been cited by the WTM in support of his conclusion.

It is hard to see how the plain reading of the aforementioned definition suggests that it includes all commercial dealings related to securities, or in any case pledge of shares. The last part of the definition uses the very term that is being defined as part of the definition and the WTM assumes a prior understanding of the phrase “dealing in securities” to include all commercial dealings related to securities. While it is true that it has been given the widest of meanings in various decisions by the SAT and other courts, this is the first time that the phrase has been used to include within its scope pledge of shares, in the context of insider trading under the erstwhile PIT Regulations. The WTM could have used this opportunity to carefully outline the scope of the phrase “dealing in securities” in the context of insider trading. To state that the definition also does not concern itself with the mode of transfer in order for pledge to fall within its ambit is also incorrect because pledge does not involve transfer of shares.

Regulation 2(b) of the PFUTP Regulations also defines the phrase “dealing in securities” to include “an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in section 12 of the Act.” The definition of the phrase under PFUTP Regulations is far more precise and it is clear from a plain reading of the definition that it would include pledge of shares within its ambit. However, there is no provision either in the PIT Regulations or the SEBI Act or the PFUTP Regulations that allows SEBI to supplant the definition in PIT Regulations by a definition of the phrase in PFUTP Regulations.

Be that as it may, the WTM states that in order to prove the charge of insider trading under Regulation 3(i), SEBI must prove that (a) the person is an 'insider', (b) he is in possession of UPSI and (c) he deals in securities of the company while in possession of the UPSI either on his own behalf or on behalf of any other person. Since all the elements were present in the case of SRSR Holdings, he concludes that SRSR Holdings is guilty of insider trading. As has been stated above, the reasons provided by the WTM for arriving at this conclusion are far from adequate.

Furthermore, the line of reasoning adopted by the WTM renders all pledge transactions by promoters of listed companies vulnerable to the charge of insider trading. All promoters are insiders and they tend to have UPSI of their companies on an ongoing basis and a transaction involving even a bona fide pledge of shares will squarely fall within Regulation 3(i) of the PIT Regulations. The issue of what constitutes a bona fide pledge transaction is also far from clear. The WTM in his order has not inquired into whether or not the pledge of shares by SRSR Holdings was genuine or bona fide. That does not seem to be a factor that needs to be taken into consideration in order to decide whether a pledge transaction amounts to insider trading. What remains to be seen is whether SEBI, based on this decision, will now start looking into old pledge transactions to see whether there was any “insider trading”.

The WTM also makes a rather specious claim that the “act was manipulative and deceptive in nature devised to defraud unsuspecting investors” and concludes that the SRSR Holdings has made a “wrongful gain” of Rs. 1,258 crores, presumably at the expense of unsuspecting investors and ordered SRSR Holdings to disgorge the said amount along with a simple interest of 12% p.a. from January 7, 2009 till the date of repayment. The WTM could have used this opportunity to articulate as to how pledge of shares affects the interests of the investor community as a whole instead of treating it in a self-evidentiary manner. It is hard to understand just how the mere act of pledging shares by SRSR Holdings resulted in defrauding investors. Further, he could have also provided reasons as to how these transactions resulted in a wrongful gain to SRSR Holdings at the expense of investors and not the lenders. It is probable that the borrowers and the pledgor may have misrepresented or even defrauded the lenders in order to induce them to advance loans, but it is hard to see how it affects the investor community as a whole. The WTM has also not considered the fact that the lenders would have recovered at least a part of their dues from the borrowers after having sold the pledged shares upon invocation, between December 23, 2008 and January 7, 2009 and the lenders would have a right to legal recourse to recover the remaining dues from the borrower and / or enforce other security that they may have obtained, based on the loan documents. Assuming for a moment that the lenders have already been paid off, any “wrongful gains” made by SRSR Holdings would have been duly paid back and there is also no evidence of any shareholders having suffered any injury on account of these transactions.

To state that SRSR Holdings made a wrongful gain of Rs. 1,258 crores would, therefore, be incorrect. In any event, the rightful recipients of the loan amount and interest thereon are the lenders. Issuing directions under Regulation 11(1), 11(4) and 11(B) to remit the funds to SEBI’s Investor Protection Fund as they are required to under this order is neither fair nor just and it does not serve the investor community in any way other than adding to the substantial cash pile that SEBI is already sitting on. SEBI has wide powers to issue directions under the aforementioned provisions and the importance of using them wisely and judiciously can never be overstated.      


The SEBI order is the first of its kind – where a pledge transaction has been held to be insider trading under the erstwhile PIT Regulations. As has been stated above, the order of the WTM does not seem to consider genuineness or bona fides of the pledge transaction to be one of the factors in deciding whether it amounts to insider trading. This aspect of the order does not portend well for promoters of listed companies, given the proclivity of SEBI to investigate old cases. Perhaps it would have been wiser to have charged SRSR Holdings under the PFUTP Regulations given the clarity in the definition of “dealing of shares” and the wide definition of “fraud” under Regulation 2(c) of the PFUTP Regulations. However, in that case, the burden of proof would have been on SEBI to prove that the pledge transaction was fraudulent, unlike the PIT Regulations where the burden of proof is on SRSR Holdings to prove its innocence.

However, the new SEBI PIT Regulations, 2015 and the Guidance Note that was issued recently by SEBI explicitly states that SEBI’s intent is to prohibit creation and invocation of pledge when in possession of UPSI. The silver lining, if one can call it that, is that the pledgor or pledgee can use the defenses available to them under Regulation 4 and demonstrate that the creation or invocation of the pledge was bona fide, unlike the view taken by the WTM in this order.   

- Shashank Prabhakar

[1] Regulation 3 (1) of the PIT Regulations states that no “insider” shall either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information. 

Friday, September 25, 2015

RBI’s Proposal for a Major Recast of ECB Norms

[The following guest post is contributed by Vinod Kothari of Vinod Kothari & Co. It deals with the details of the proposals announced by the RBI.

In an earlier post, Pratik Datta sets out the background to RBI’s proposals]

The Reserve Bank of India (RBI) has proposed a major recast of the norms for external commercial borrowings (ECBs). While India is still far from capital account convertibility, the RBI has proposed two new options for borrowings, which, in terms of end-use restrictions, will almost be at par with foreign direct investment (FDI). These two are: long-term foreign borrowings, and rupee-denominated foreign borrowings.

These proposed reforms seem to be a part of a larger exercise to ease the existing regime for ECBs. Recently, the RBI allowed rupee-denominated trade credit.[1] It has also proposed permitting rupee-denominated offshore bonds, for which draft guidelines were circulated earlier, and now, in view of the already liberalised approach towards long-term ECBs, it seems that the end-use restrictions in case of rupee-denominated overseas bonds may be linked with their tenure.

Reforms to the ECB framework were suggested by a Committee headed by Mr M S Sahoo, which, in an elaborate and highly readable report, made several far reaching recommendations.

Long-term ECBs

The key stance of the proposed new ECB framework, set out in the press release of 23 September 2015, is the creation of a new class of ECBs, long-term ECBs (LTECBs). An LTECB is one that has a minimum maturity of 10 years. The maturity will be 10 years average maturity in case of loans, and 10 years tenure in case of bonds, assuming, perhaps, that the bonds are bullet-repaying bonds. In case of LTECBs, the new framework will only lay a minimalistic negative list, and therefore, practically, the end-use restrictions will be bare minimum.

For the sake of context, it is notable that the primary differentiator between ECBs and FDI is the end-use restrictions. ECB is a debt; it has a repayment obligation – hence the RBI allows ECBs to be used with strict end-use restrictions. FDI, on the other hand, is contribution to capital, and hence, does not involve any repayment obligation on the investee. Therefore, there are no end-use restrictions in case of FDI. The most common end-use restriction on ECBs is that ECBs are allowed to be used only for capital expenditure. A very limited window exists in case of ECBs provided by a foreign direct equity holder, subject to limits and conditionalities, where the ECB may be used for working capital as well. ECBs may also be used, subject to limits, for repaying rupee loans taken for working capital.

The negative list in case of LTECBs is proposed with the following items:

i. Real estate activities other than development of integrated township / affordable housing projects;

ii. Investing in capital market and using the proceeds for equity investment domestically;

iii. Activities prohibited as per FDI guidelines;

iv. On-lending to other entities with any of the above objectives;

v. Purchase of land

Notably, this negative list is almost similar to that in case of FDI.

Interestingly, the restriction on on-lending to other entities seems to be applicable only if the downstream borrower entity is engaged in one of the restricted activities mentioned above. In this respect too, the restriction is similar to that in case of FDI, where downstream investment by FDI recipient companies is applicable if the end-recipient is engaged is one of the activities in which FDI is either prohibited, or is subject to sectoral caps.

Rupee-denominated ECBs

The other instrument that RBI proposes to allow, once again with minimum end-use restrictions, is rupee-denominated ECBs. While in this case, the end-use restrictions are similar to those for LTECBs, the added feature is that real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are also allowed to avail of such ECBs. It is notable that SEBI regulations permit REITs and InvITs to leverage up to 49 per cent of their asset value.[2]

Rupee-denominated ECBs leave the Indian borrower free from any foreign exchange risk. Therefore, the cost of these borrowings is intended to be completely left to the discretion of the borrower – they will be commensurate with domestic borrowing costs. However, the lender here takes the risk of INR. Therefore, the lender will be “allowed”[3] to hedge INR exposure by on-shore hedging. It is common knowledge that a foreign investor or entity having exposure in INR may either hedge himself in India, using deliverable forward contracts, or may hedge outside India, using the so-called no deliverable forward market, or may leave the exposure unhedged.

Some further liberalisations in the existing ECB framework

In addition to the above proposals, there are several liberalisations in the existing ECB framework, that is, 3 years minimum average maturity.

First of all, the end-use list is proposed to be expanded to include the following:

1. To repay trade credit taken for period up to 3 years for capital expenditure;

2. For payment towards capital goods already shipped / imported but not paid;

3. Purchase of second hand domestic capital goods / plant / machinery;

4. On-lending to infra-Special Purpose Vehicles;

5. Overseas direct investment in Joint Venture/ Wholly Owned Subsidiaries by Core Investment Companies coming under the regulatory framework of RBI;

6. For on-lending to infrastructure sector and for import and/or domestic purchase of equipment for the purpose of giving the same on hire purchase, as loans against hypothecation or leasing to infrastructure sector by all NBFCs (subject to minimum 75% hedging). Note that the existing policy allowed only for infrastructure leasing.

The list of eligible lenders is also proposed to be expanded to include the following:

1. Overseas regulated financial entities: this generalised term will mean any entity which is regulated by the regulator of the jurisdiction. Thus, offshore funds, if regulated, will also be eligible. Offshore leasing entities will be eligible to provide financial leases, and so on.

2. Pension funds;

3. Insurance funds;

4. Sovereign wealth funds and similar long term investors.


The proposed changes in the ECB framework are welcome. Hopefully, these will help the cost of domestic borrowings to come down, by establishing a benchmark yield curve of rupee borrowings overseas. IFC’s Masala Bonds and other similar offshore rupee-denominated issuances have created quite an interest in the market, and practitioners are now eagerly awaiting the final regulatory framework for rupee denominated bonds as well. It is important for the Central Board of Direct Taxes to also come up with necessary changes in the rules for withholding taxes – otherwise, the current disparity between withholding tax applicable to a foreign portfolio investor registered in India, and a foreign investor investing without an FPI registration, will continue to remain.

- Vinod Kothari

[1] Trade credit includes short-term borrowings, that is, for a weighted maturity up to 3 years, for financing imports.
[2] For detailed discussions on REITs and SEBI regulations, see here:
[3] From the use of the expression, it seems this will not be a mandatory condition.