Executive Summary:
This notification, titled the Foreign Exchange Management Deposit Amendment Regulations, 2018, amends the 2016 regulations. It addresses regulations concerning foreign investments, NRO accounts for specific individuals, SNRR account tenures, and escrow account terms. These amendments are effective from the date of publication in the Official Gazette.
Key Points / Main Content:
* **Regulation 7 Amendment:**
* Authorised Dealers can allow Foreign Portfolio Investors (FPIs) and Foreign Venture Capital Investors (FVCIs) registered with SEBI to open and maintain non-interest-bearing foreign currency accounts for investments, as per updated regulations.
* **Schedule 3 Amendment (NRO Accounts):**
* Citizens of Bangladesh or Pakistan from minority communities (Hindus, Sikhs, Buddhists, Jains, Parsis, and Christians) with a Long Term Visa (LTV) can open one NRO account with an authorised dealer.
* The NRO account will convert to a resident account upon acquiring Indian citizenship per the Citizenship Act, 1955.
* Individuals from the same communities with pending LTV applications can open an NRO account for six-month periods, renewable with a valid visa and residential permit.
* **Schedule 4 Amendment (SNRR Accounts):**
* SNRR account tenure should align with the contract period, not exceeding seven years, requiring Reserve Bank approval for renewals.
* The seven-year limit does not apply to SNRR accounts opened for investments in accordance with updated regulations.
* **Schedule 5 Amendment (Escrow Accounts):**
* Replaces the existing Schedule 5 with updated terms for opening INR escrow accounts with an Authorised Dealer as an Escrow Agent.
* Specifies permitted credits and debits for escrow accounts used by resident and non-resident corporates for capital instrument transfers, subject to SEBI regulations.
* Defines operational guidelines, including maximum durations (typically six months, with exceptions up to 18 months under specific conditions), non-interest-bearing status, and compliance with KYC guidelines.
Impact Analysis:
* **Authorised Dealers:**
* Impact: Must adhere to the new guidelines for opening and maintaining foreign currency accounts, NRO accounts, SNRR accounts, and escrow accounts, ensuring compliance with updated regulations.
* Action Required: Update internal procedures and train staff to comply with the amended regulations.
* **Foreign Portfolio Investors (FPIs) and Foreign Venture Capital Investors (FVCIs):**
* Impact: Benefit from the ability to open non-interest-bearing foreign currency accounts for investment purposes.
* Action Required: Coordinate with Authorised Dealers to open and manage these accounts as per the new regulations.
* **Minority Community Citizens from Bangladesh and Pakistan Residing in India:**
* Impact: Granted the ability to open NRO accounts under specific conditions related to their visa status.
* Action Required: Provide necessary documentation (visa, residential permit, LTV) to Authorised Dealers to open and maintain NRO accounts.
* **Businesses and Individuals Involved in Capital Instrument Transfers:**
* Impact: Subject to revised terms and conditions for using escrow accounts in acquisition and transfer transactions.
* Action Required: Ensure escrow account arrangements comply with the new Schedule 5, including duration limits and permitted transactions.
* **Reserve Bank of India:**
* Impact: Responsible for overseeing compliance with these amended regulations.
* Action Required: Monitor the implementation and effectiveness of these amendments through reporting and compliance checks.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the foreign exchange market and issuing notifications related to the Foreign Exchange Management Act (FEMA).
Foreign Exchange Management Act, 1999: An Act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Foreign Exchange Management Deposit Regulations, 2016: Regulations issued by the Reserve Bank of India governing deposits under the Foreign Exchange Management Act.
Securities and Exchange Board of India: The regulator of the securities market in India.
Foreign Portfolio Investor: An investor making investments in the financial assets of a country.
Foreign Venture Capital Investor: An investor making investments in venture capital.
Bangladesh: A country in South Asia, specifically mentioned in the context of citizens belonging to minority communities residing in India.
Pakistan: A country in South Asia, specifically mentioned in the context of citizens belonging to minority communities residing in India.
RESERVE BANK OF INDIA
FOREIGN EXCHANGE DEPARTMENT
CENTRAL OFFICE
Mumbai 400 001
Notification No. FEMA 5 (R)(1)/2018-RB November 09, 2018
Foreign Exchange Management (Deposit) (Amendment) Regulations, 2018
In exercise of the powers conferred by clause (f) of sub section (3) of Section 6 of the Foreign Exchange Management
Act, 1999 (42 of 1999), the Reserve Bank makes the following amendments to the Foreign Exchange Management
(Deposit) Regulations, 2016, Notification No. FEMA 5(R)/2016-RB dated April 1, 2016, namely:
1. Short Title and Commencement:-
(i) These regulations may be called the Foreign Exchange Management (Deposit) (Amendment) Regulations, 2018.
(ii) These regulations shall come into force from the date of their publication in the Official Gazette.
2. Amendment to Regulation 7:
In Regulation 7, after the existing sub-regulation (4), the following shall be added, namely:
“5. An Authorized Dealer in India may allow a Foreign Portfolio Investor and a Foreign Venture Capital
Investor, both registered with the Securities and Exchange Board of India (SEBI) under the relevant SEBI
regulations to open and maintain a non-interest bearing foreign currency account for the purpose of making
investment in accordance with Foreign Exchange Management (Transfer or issue of security by a person
resident outside India) Regulations, 2017, as amended from time to time.
3. Amendment to Schedule 3:
In Schedule 3, in para 1, under the heading, ‘Notes’, after existing para ‘D’, the following shall be added, namely:
“E. A person being a citizen of, Bangladesh or Pakistan belonging to minority communities in those
countries, namely, Hindus, Sikhs, Buddhists, Jains, Parsis and Christians who is residing in India and has
been granted a Long Term Visa (LTV) by the Central Government is permitted to open with an authorized
dealer only one NRO Account. The said NRO account shall be converted to a resident account once the
person becomes a citizen of India within the meaning of the Citizenship Act, 1955. Such accounts can be
opened by Authorised Dealers only,
F. A person being a citizen of Bangladesh or Pakistan belonging to minority communities in those
countries, namely, Hindus, Sikhs, Buddhists, Jains, Parsis and Christians who is residing in India and has
applied for a Long Term Visa (LTV) which is under consideration of the Central Government is permitted
to open with an authorised dealer only one NRO Account which will be opened for a period of six months
and may be renewed at six monthly intervals subject to the condition that the individual holds a valid visa
and valid residential permit issued by Foreigner Registration Office (FRO)/ Foreigner Regional
Registration Office (FRRO) concerned. Such accounts can be opened by Authorised Dealers only,”
4. Amendment to Schedule 4:
In Schedule 4, for the existing paragraph 8, the following shall be substituted, namely:
“The tenure of the SNRR account should be concurrent to the tenure of the contract/ period of operation/ the
business of the account holder and in no case should exceed seven years. Approval of the Reserve Bank shall
be obtained in cases requiring renewal.
Provided the restriction of seven years shall not be applicable to SNRR accounts opened by a person resident
outside India for the purpose of making investment in India in accordance with Foreign ExchangeManagement (Transfer or issue of security by a person resident outside India) Regulations, 2017, as amended
from time to time.”
5. Amendment to Schedule 5:
In the Foreign Exchange Management (Deposit) Regulations, 2016 (Notification No.FEMA.5(R)/2016-RB dated April
1, 2016), for the existing Schedule 5, the following shall be substituted, namely:
Schedule 5
(See Regulation 5(5))
Terms and conditions for opening of Escrow Account
An Escrow account in INR can be opened jointly and severally with an Authorised Dealer in India as an Escrow Agent
in the following cases subject to the terms and conditions specified in this schedule.
1. By non-resident corporates for acquisition/ transfer of capital instruments/convertible notes through open offers/
delisting/ exit offers.
a. Permitted Credits in the Escrow account are:
i. Foreign Inward remittance through banking channels
ii. by way of a guarantee issued by an authorised dealer bank subject to terms and conditions as
specified in the Foreign Exchange Management (Guarantee) Regulations 2000, as amended from time
to time.
b. Permitted debits in the Escrow account are:
i. As per SEBI (SAST) Regulations or any other regulations issued by the Security Exchange Board
of India (SEBI).
c. The resident mandatee empowered by the overseas acquirer for this purpose, may operate the Escrow
account in accordance with SEBI (SAST) Regulations or any other regulations issued by the SEBI.
d. The Escrow account shall be closed immediately after completing the requirements as outlined above.
2. By resident and non-resident acquirers for acquisition/ transfer of capital instruments/convertible notes
a. Permitted Credits in the Escrow account are:
i. Foreign Inward remittance through banking channels;
ii. Receipt of rupee consideration through banking channels by the resident acquirer of capital
instruments/convertible notes who proposes to acquire from non-resident holders by way of transfer.
iii. by way of a guarantee issued by an authorised dealer bank subject to terms and conditions as
specified in the Foreign Exchange Management (Guarantee) Regulations 2000, as amended from time
to time.
b. Permitted debits in the Escrow account are:
i. Remittance of consideration for issue/ transfer of capital instruments/convertible notes directly into
the bank account of the beneficiary (issuer in India or transferor of capital instruments/convertible
notes in India or abroad);ii. Remittance of consideration for refund to the initial remitter of funds in case of failure/ non-
materialisation of FDI transaction for which the Escrow account was opened.
c. The securities kept/ linked with the Escrow account may be linked with demat account maintained with
SEBI authorised Depositary Participants as Escrow agents.
d. The Escrow account shall remain operational for a maximum period of six months only and the account
shall be closed immediately after completing the requirements as outlined above or on completion of six
months from the date of opening of such account, whichever is earlier. In case the Escrow account is required
to be maintained beyond six months, specific permission from the Reserve Bank has to be sought.
e. Notwithstanding what has been stated in paragraph d. above, in case of transfer of capital instruments
between a resident buyer and a non-resident seller or vice-versa, if so agreed between the buyer and the seller,
an escrow arrangement may be made between the buyer and the seller for an amount not more than twenty five
per cent of the total consideration for a period not exceeding eighteen months from the date of the transfer
agreement.
3. Acquisition/ transfer shall be in accordance with the provisions of Foreign Exchange Management (Transfer or Issue
of Security by a person resident Outside India) Regulation 2017, as amended from time to time and Security Exchange
Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 [SEBI (SAST) Regulations] or
other relevant regulations issued by the SEBI.
4. The Escrow account shall be non-interest bearing.
5. No fund or non-fund based facilities would be permitted against the balances in the Escrow account.
6. Requirement of compliance with KYC guidelines issued by the Reserve Bank shall rest with the Authorised Dealer.
7. Balance in the Escrow account, if any, may be repatriated at the then prevailing exchange rate (i.e., the exchange rate
risk will be borne by the person resident outside India acquiring the capital instruments/convertible notes), after all the
formalities in respect of the said acquisition are completed.
8. In cases, where proposed acquisition/ transfer does not materialise, the authorised dealer may allow repatriation/
refund of the entire amount lying to the credit of the Escrow account on being satisfied with the bonafides of such
remittances.
9. For the purpose of FDI reporting, date of transfer of funds into the bank account of the issuer or transferor of capital
instruments/convertible notes, as the case may be, shall be the relevant date of remittance.
(R K Moolchandani)
Chief General Manager
The Principal Regulations were published in the Official Gazette of Government of India – Extraordinary – Part-II,
Section 3, Sub-Section (i) dated 01.04.2016- G.S.R.No.389(E)
G.S.R. No. 1093 (E) dated 09.11.2018.