Foreign Exchange Advisory

Under the RBI Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations (updated through 2024), ECB proceeds may be used for capital expenditure, working capital (only for eligible entities under the Track III framework), and refinancing of existing ECB. However, ECB cannot be used for real estate activities (other than affordable housing as defined by NHB), equity investment, repayment of Rupee loans from domestic banks except where specifically permitted, or for on-lending to other entities. Eligible borrowers under Track I (USD 750 million minimum average maturity 3 years) include manufacturing companies, infrastructure sector entities, and software sector companies, while NBFCs and MFIs have specific restrictions under Track II and Track III.

An Indian company may issue a guarantee on behalf of its wholly owned overseas subsidiary under Regulation 16 of FEMA Notification No. 120/RB-2004 (Overseas Direct Investment), but the guarantee must be within the overall ODI limit of 400% of the net worth of the Indian company as on the date of the last audited balance sheet. The guarantee must be reported to the Reserve Bank of India in Form ODI Part II within 30 days of issuance. Any invocation of the guarantee must be separately reported under Regulation 16(3), and the amount invoked is treated as an ODI outflow. Guarantees in favour of step-down subsidiaries require prior RBI approval if the Indian company does not hold 51% or more in the intermediate entity.

On receipt of FDI, the Indian company must report the inflow to its AD Category-I bank within 30 days using the Advance Remittance Form, and subsequently issue shares and file Form FC-GPR on the FIRMS portal (https://firms.rbi.org.in) within 30 days of allotment under Regulation 4 of FEMA Notification No. 20(R)/2017-RB. Late filing attracts compounding under the Compounding of Contraventions Rules 2024, with fees starting at Rs 5,000 per day subject to a cap, or can be compounded at the RBI's discretion under Section 15 of FEMA 1999. The compounding application must be filed with the RBI's Compounding Authority along with all supporting documents, and it is advisable to file promptly as the RBI has tightened its stance on serial late filings.

An Indian resident individual may invest in foreign equity under the Liberalised Remittance Scheme up to USD 250,000 per financial year under Schedule III of FEMA Notification No. 20(R)/2017-RB, which permits acquisition of foreign securities including shares and mutual funds abroad. However, investment in countries identified in FATF's grey or black list is prohibited even under LRS. Indian companies making overseas direct investment must comply with FEMA Notification No. 120/RB-2004 and the ODI limit of 400% of net worth, and must file Form ODI Part I before remitting. Remittances under LRS must be routed through an AD bank which will report the transaction to RBI under the relevant return framework.

A Full Fledged Money Changer licence is issued by the Reserve Bank of India under Section 10 of FEMA 1999 and the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, and is mandatory for any entity that buys and sells foreign currency notes, traveller's cheques, or money transfers from the public as a business activity. Entities that only exchange currency incidentally (e.g. a hotel converting currency for its own guests) may apply for a Restricted Money Changer licence instead. The FFMC licence requires a minimum net owned fund of Rs 25 lakh for a single branch and is non-transferable. Conducting money changing activities without an FFMC licence is a contravention under Section 13 of FEMA 1999, punishable with a penalty up to three times the sum involved.