#foreign exchange management (borrowing and lending in rupees) regulations 2

[iasshikshalove]

Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019

GS-1 Fire in Amazon Why in news? Fires across the Brazilian Amazon have sparked an international outcry for preservation of the world's largest rainforest. Here's a look at the role the Amazon plays in regulating the world's climate: Amazon fires: Is the world's oxygen supply at risk?  No.  While it's commonly said that the Amazon produces 20% of the world's oxygen, climate scientists say that figure is wrong and the oxygen supply is not directly at risk in any case.  That's because forests, including the Amazon, absorb roughly the same amount of oxygen they produce. Plants do produce oxygen through photosynthesis, but they also absorb it to grow, as do animals and microbes.  That doesn't mean the fires aren't a problem for the planet. The Amazon is a critical absorber of carbon of carbon dioxide, a greenhouse gas produced by burning fossil fuels, like oil and coal. Is the Amazon rainforest the "lungs of the planet"?  The Amazon rainforest is frequently referred to as the "lungs of the planet," but it may not be the most accurate analogy for the forest's role.  Carlos Nobre, a University of Sao Paulo climate scientist, says a better way to picture the Amazon's role is as a sink, draining heat-trapping carbon dioxide from the atmosphere.  Currently, the world is emitting around 40 billion tons of CO2 into the atmosphere every year. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019  The Amazon absorbs 2 billion tons of CO2 per year (or 5% of annual emissions), making it a vital part of preventing climate change. What do the fires in the Amazon mean for the world's climate?  Fires in the Amazon not only mean the carbon-absorbing forest is disappearing, but the flames themselves are emitting millions of tons of carbon every day.  Nobre says we're close to a "tipping point" that would turn the thick jungle into a tropical savannah.  The rainforest recycles its own water to produce a portion of the region's rain, so deforestation makes rains less frequent, extending the dry season.  Nobre estimates that if 20% to 25% of the forest is destroyed, the dry season will expand enough that it will no longer be a forest, but a savannah. What is causing the Amazon fires?  The current fires in the Amazon are not wildfires.  They are manmade and are mostly set illegally by landgrabbers who are clearing the forest for cattle ranching and crops.  Deforesting the Amazon is a long, slow process.  People clear the land by cutting down the vegetation during the rainy season, letting the trees dry out and burning them during the dry season.  Fully clearing the dense forest for agricultural use can take several years of slashing and burning. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019 GS-3 Union HRD Minister launches Integrated Online junction for School Education ‘Shagun’ Union Human Resource Development Minister Shri Ramesh Pokhriyal ��Nishank’ launched one of world’s largest Integrated Online Junction for – School Education ‘Shagun’ in New Delhi today. Aboutl SHAGUN  School Education Shagun (URL: htpp://shagun.govt.in/) is an over-arching initiative to improve school education system by creating a junction for all online portals and websites relating to various activities of the Department of School Education and Literacy in the Government of India and all States and Union Territories.  Minister informed that websites of 1200 KendriyaVidyalayas, 600 NavodayaVidyalayas, 18000 other CBSE affiliated schools, 30 SCERTs, 19000 organisations affiliated with NTCE among others are integrated with Shagun.  Report cards of 15 lakh schools all over the country will be available on the newly created junction, the Minister explained.  The portal seeks to connect approximately 92 lakh teachers and 26 crore students.  Common people can directly give their feedback about schools which will further increase the public participation and will ensure accountability and transparency. The main focus will be on the following areas:  Reinforcing and cleaning the data of the Integrated Online Junction through feedback from Stakeholders  Ensuring full inter-operability among the websites, portals and applications which are already hosted in the junction  Creating high quality e-contents, including quizzes and puzzles to enhance learning and also for teachers in aiding classroom transactions  Using artificial intelligence and deep machine learning in a variety of ways to enhance the quality of school education including for designing evidence based inventions.  A booklet giving features and benefits of Shagun was also released on the occasion. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019 QR code Delhi Lieutenant Governor Anil Baijlal last week launched the "QR Code" scheme, which will be delivered through Delhi Police's "Himmat Plus" app meant to ensure the safety of women. The QR codes will be put on public transport vehicles such as auto-rickshaws and non-app (black-andyellow) cabs; passengers, especially women, will be able to verify the details of drivers, and send a distress signal in an emergency. About The QR Code scheme  The QR Code will be put on a banner or card at the back of the driver's seat in all registered taxis and autos.  The code can be scanned by using the Himmat Plus app.  If a user chooses to report the journey using the 'Report Journey' button, the app will send the passenger’s location and the driver’s unique ID to the police.  In case the driver is not registered, the passenger can call the police control room in case of an emergency, or tap the 'SOS' button on the app. The Himmat Plus app  The Himmat Plus app itself was launched in 2015 to allow users to make a distress call or send an emergency message to Delhi Police and the emergency contact.  While the Himmat Plus app is targeted at women’s safety, both men and women can register themselves. The interface is available in English and Hindi.  Users in distress can tap either the 'SOS' button or the 'power' button, or use the 'shake to alert' feature, to send a message to Delhi Police and the listed emergency contact. Activating the distress button also enables automatic video recording on the user's phone. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019  For users in Delhi, the Central Police Control Room, ITO, will respond to the emergency call, and PCR vans will be activated. For users outside Delhi, support will be extended by the respective control rooms by hotline or wireless communication. GS-3 RBI transfers Why in news? On Monday, the RBI Central Board decided to transfer a record surplus — Rs 1.76 lakh crore — to the government. The RBI transfers its surplus to the government every year. So what is special about the pay out this time?  Yes, the RBI does transfer its surplus annually to the government, the owner of the institution, after making adequate provisions for contingencies or potential losses.  The profit that is distributed has varied, averaging over Rs 50,000 crore over the last few years.  On Monday, the RBI Board accepted the recommendations of a committee headed by former Governor Bimal Jalan on transfer of excess capital. Based on the panel’s report, the Central Board decided to transfer a surplus of Rs 1.23 lakh crore and Rs 52,637 crore of excess provisions made over the years.  This marks the first time the RBI will be paying out such a huge amount, a one-off transfer. Earlier, the government had budgeted for Rs 90,000 crore from the RBI as dividend for this fiscal year. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019 On what rationale was such a huge payout approved?  The level of surplus or profits the RBI pays to the government has been an issue of conflict two for long.  Over the last decade or more, the government had sought higher payouts saying the RBI was maintaining reserves or capital buffers that were much higher than many other global central banks’ buffers.  The government has argued that such relatively lower transfers crimped public spending for infrastructure projects and social sector programmes, considering the pressure to meet deficit targets and to provide space for private firms to borrow.  With the government amplifying its demand for a higher transfer, the Jalan committee reviewed the capital structure, statutory provisions and other issues relating to the RBI balance sheet.  After making a distinction on the RBI’s capital structure especially on unrealised gains (which are essentially gains not booked) and taking into account the role of the central bank in ensuring financial stability, potential risks and global standards, the committee suggested a total transfer of Rs.1.76 lakh crore. How does the RBI generate surplus?  A significant part comes from RBI’s operations in financial markets, when it intervenes for instance to buy or sell foreign exchange; Open Market operations, when it attempts to prevent the rupee from appreciating; as income from government securities it holds; as returns from its foreign currency assets that are investments in the bonds of foreign central banks or top-rated securities; from deposits with other central banks or the Bank for International Settlement or BIS; besides lending to banks for very short tenures and management commission on handling the borrowings of state governments and the central government.  RBI buys these financial assets against its fixed liabilities such as currency held by the public and deposits issued to commercial banks on which it does not pay interest.  The RBI’s expenditure is mainly on printing of currency notes, on staff, besides commission to banks for undertaking transactions on behalf of the government and to primary dealers that include banks for underwriting some of these borrowings.  The central bank’s total costs, which includes expenditure on printing and commissions forms, is only about 1/7th of its total net interest income. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019 Why are these called transfers to the government, rather than dividends?  That is because the RBI is not a commercial organisation like banks and other companies owned or controlled by the government to pay a dividend to the owner out of the profit generated.  Though it was promoted as a private shareholders’ bank in 1935 with a paid-up capital of Rs 5 crore, the government nationalised it in January 1949, making the sovereign the “owner”.  What the RBI does is transfer the surplus — excess of income over expenditure —to the government.  Under Section 47 of the RBI Act, “after making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and for all other matters for which provision is to be made by or under this Act or which are usually provided for by bankers, the balance of the profits shall be paid to the Central government”.  This is done in early August by the Central Board. Globally, what are the rules relating to payment of dividends by central banks?  In many top central banks — US Federal Reserve, Bank of England, German Bundesbank, Bank of Japan— the laws make it clear that profits have to be transferred to the government or the treasury.  The quantum of profits or percentage to be distributed is also specified in the laws.  The RBI’s expenditure is mainly on printing of currency notes, on staff, besides commission to banks for undertaking transactions on behalf of the government. So, what is the difference in India now and compared to the past?  The quantum is discussed and decided between the government and RBI.  Periodically, this has been guided by policies set out internally, as last time when a committee headed by Y H Malegam recommended distributing 100% of the profits made during Raghuram Rajan’s time.  The difference now is that the Jalan committee’s recommendation on a profit distribution policy has been endorsed by the Central Board. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019  That will mean a more transparent and rule-based payout from next year, as in many other central banks, which could help narrow differences between the government and RBI. What can the government do with this huge surplus?  Normally, the money is transferred to the Consolidated Fund of India from which salaries and pensions to government employees are paid and interest payments done, besides spending on government programmes.  The large payout can help the government cut back on planned borrowings and keep interest rates relatively low.  Besides, it will provide space for private companies to raise money from markets.  And if it manages to meet its revenue targets, the windfall gain can lead to a lower fiscal deficit.  The other option is to earmark these funds for public spending or specific projects, which could lead to a revival in demand in certain sectors and boost economic activity. What are the potential issues relating to a higher payout?  That has been articulated by former Governor Rajan.  According to him, much of the surplus the RBI generates comes from the interest on government assets (securities or bonds) or from capital gains made off other market participants.  When this is paid to the government, the RBI is putting back into the system the money it made from it; there is no additional money-printing or reserve creation involved, he says.  But when the RBI pays additional dividend, it has to create additional permanent reserves or, more colloquially, print money.  So, to accommodate the special dividend, the RBI will have to withdraw an equivalent amount of money from the public by selling government bonds in its portfolio, he says. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019 Why do central banks hold back on transferring large amounts?  Especially after the global financial crisis when central banks had to resort to unconventional means to revive their economies, the approach has been to build adequate buffers in the form of higher capital, reserves and other funds as a potential insurance against future risks or losses.  A higher buffer enhances the credibility of a central bank during a crisis and helps avoid approaching the government for fresh capital and thus maintain financial autonomy. G-7 Why in news? Prime Minister Narendra Modi has met US President Donald Trump on the sidelines of the G7 Summit in Biarritz in southwestern France. Modi was invited to attend the Summit as a special guest of French President Emmanuel Macron. What is the G7, and why was Prime Minister Modi invited this year? The Group of 7  The G7 or 'Group of Seven' are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.  It is an intergovernmental organisation that was formed in 1975 by the top economies of the time as an informal forum to discuss pressing world issues.  Canada joined the group in 1976, and the European Union began attending since 1977.  The G7 was known as the 'G8' for several years after the original seven were joined by Russia in 1997.  The Group returned to being called G7 after Russia was expelled as a member in 2014 following the latter's annexation of the Crimea region of Ukraine.  G7 nations meet at annual Summits that are presided over by leaders of member countries on a rotational basis. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019  The current G7 Summit being held in France is the 45th, and the next one will be held in the United States in 2020.  The host country typically gets to invite dignitaries from outside the G7 to attend the Summit. What the G7 does  The G7 Summit is an informal gathering that lasts two days, in which leaders of member countries discuss a wide range of global issues.  The groundwork for the Summit, including matters to be discussed and follow-up meetings, is done by the "sherpas", who are generally personal representatives or members of diplomatic staff such as ambassadors.  The Group was initially formed as an effort by the US and its allies to discuss economic issues, which in the late 1970s included battling a global oil crisis.  Since then, the G7 has discussed issues affecting every decade, such as financial crises, and has aimed to tackle specific challenges, such as the economic changeover of ex-Soviet bloc nations, terrorism, arms control, and drug trafficking, among others.  The G7 does not have a formal constitution or a fixed headquarters.  The decisions taken by leaders during annual Summits are non-binding.  The rise of India, China, and Brazil over the past few decades has reduced the G7's relevance, whose share in global GDP has now fallen to around 40%. G7 and G20  The G20 is a larger group of countries, which also includes G7 members.  The G20 was formed in 1999, in response to a felt need to bring more countries on board to address global economic concerns.  Apart from the G7 countries, the G20 comprises Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey.  Together, the G20 countries make up around 80% of the world's economy. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019  As opposed to the G7, which discusses a broad range of issues, deliberations at the G20 are confined to those concerning the global economy and financial markets.  India is slated to host a G20 summit in 2022. India at the G7 Summit  The invite to India to be a Biarritz Partner and to Prime Minister Modi to be a special guest at the Summit was extended by President Macron keeping in mind the common interests of India and France, such as tackling climate change and the development of renewable energy.  Prime Minister Modi collaborated closely with President Macron's predecessor, President François Hollande, in the creation of the International Solar Alliance in 2015. CITES agreement Why in news? Over a hundred nations, acting within the framework of an inter-governmental agreement, approved a proposal by India, Nepal, and Bangladesh Sunday to prohibit commercial international trade in a species of otter native to the subcontinent and some other parts of Asia. One hundred and two votes were cast in favour and 15 against, with 11 abstentions, at the ongoing Eighteenth Conference of the Parties (CoP18) of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) in Geneva. The vote must be confirmed at the Plenary of the meeting, which concludes Wednesday. Other proposals  The Conference also accepted a separate proposal by India, moved together with the EU, the US and the Philippines, for inclusion of a species of gecko lizard found widely in South and Southeast Asia, the US, and Madagascar for protection as a “species not necessarily threatened with extinction, but in which trade must be controlled in order to avoid utilisation incompatible with their survival”. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019 Animals and appendices  Members at the Conference have voted to move the smooth-coated otter (Lutrogale perspicillata) from CITES Appendix II to CITES Appendix I “because it is considered to be facing a high risk of extinction and is detrimentally affected by international trade, as well as habitat loss and degradation and persecution associated with conflict with people (and fisheries)”.  The other proposal that was passed was to include the Tokay gecko (Gekko gecko) in CITES Appendix II.  Appendix I includes species “threatened with extinction”; according to the CITES website, “trade in specimens of these species is permitted only in exceptional circumstances”.  Appendix II provides a lower level of protection.  There is also an Appendix III, which “contains species that are protected in at least one country, which has asked other CITES Parties for assistance in controlling the trade”.  An AFP report said smooth-coated otter numbers in the wild had fallen by at least 30% over the past 30 years, and in Japan, where keeping otters as “cute” pets is a fad, otter cafes offer baby otters for up to $10,000 (almost Rs 7.2 lakh) each.  Apart from the smooth-coated otter, India had proposed Appendix I status for the small-clawed otter, mako shark (Isurus oxyrinchus), the Indian star tortoise (Geochelone elegans) and the Tokay gecko. The International Convention  The CITES website describes it as an international agreement aimed at ensuring "that international trade in specimens of wild animals and plants does not threaten their survival".  CITES was drafted after a resolution was adopted at a meeting of the members of the International Union for Conservation of Nature (IUCN) in 1963.  The text of the Convention was agreed at a meeting of the representatives of 80 countries in Washington, DC, on March 3, 1973; the Convention is, therefore, sometimes referred to as the Washington Convention. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019  CITES entered into force on July 1, 1975, and now has 183 parties. States and regional economic integration organisations adhere voluntarily to CITES.  The Convention is legally binding on the Parties in the sense that they are committed to implementing it; however, it does not take the place of national laws.  In effect, CITES provides a framework for Parties to make domestic legislation to ensure that the Convention is implemented effectively in their national jurisdictions. Cabinet approves Establishment of an International Coalition for Disaster Resilient Infrastructure The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has given ex-post facto approval for the Establishment of an International Coalition for Disaster Resilient Infrastructure (CDRI) along with its supporting Secretariat Office in New Delhi. About CDRI  The CDRI is proposed to be launched at the UN Climate Action Summit in New York, USA on 23rd September 2019.  Organized by the UN Secretary General, this event will bring together the largest number of Heads of States to generate commitments for combating the effects of climate change and resulting disasters, and will provide the high-level visibility required for the CDRI. The approval, inter-alia, is for the following initiatives:  Establishment of the International ‘C.D.R.I.’ along with its supporting Secretariat office in New Delhi;  Establishment of the Secretariat of the CDRI as a Society under The Societies Registration Act,1860 in New Delhi as ‘CDRI Society’ or similar name as per availability.  The memorandum of association and by-laws of the ‘CDRI Society’ will be prepared and finalized by the National Disaster Management Authority (NDMA), in due course; Major Impact:  The CDRI will serve as a platform where knowledge is generated and exchanged on different aspects of disaster and climate resilience of infrastructure.  It will bring together technical expertise from a multitude of stakeholders. Daily Current Affairs Dated From 27-Aug-2019 To 29-Aug-2019  In doing so, it will create a mechanism to assist countries to upgrade their capacities and practices, with regard to infrastructure development in accordance with their risk context and economic needs.  This initiative will benefit all sections of society.  Economically weaker sections of society, women and children, are the most vulnerable to the impacts of disasters and hence, will be benefitted from the improvement of knowledge and practice in creating disaster resilient infrastructure.  It will also benefit all areas with high disaster risk. In India, the north-eastern and Himalayan regions are prone to earthquakes, coastal areas to cyclones and tsunamis and central peninsular region to droughts. Innovation:  There are many initiatives on different aspects of disaster risk reduction and many initiatives on infrastructure development in different in a range of countries with different disaster risk and development contexts.  A global coalition for disaster resilient infrastructure would address concerns that are common to developing and developed countries, small and large economies, countries at early and advanced stages of infrastructure development, and countries that have moderate or high disaster risk.  Few concrete initiatives work at the intersection of Sendai Framework, Sustainable Development Goals (SDGs) and Climate Change Adaptation with a focus on infrastructure. Focus on disaster resilient infrastructure would simultaneously address the loss reduction targets under the Sendai Framework, address a number of SDGs and also contribute to climate change adaptation.  Hence, there is a clear niche for a Global Coalition for Disaster Resilient Infrastructure.  Publication of natural hazard risk information about the different regions in India will allow the public to understand the risk in their regions and demand for risk mitigation and preparedness measures from their local and State Governments.

[postolo]

External Commercial Borrowings (ECB) Policy – New ECB Framework

The salient features of the new framework are as under:

Merging of Tracks: Merging of Tracks I and II as “Foreign Currency denominated ECB” and merging of Track III and Rupee Denominated Bonds framework as “Rupee Denominated ECB”.

Eligible Borrowers: This has been expanded to include all entities eligible to receive FDI. Additionally, Port Trusts, Units in SEZ, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/cooperatives and non-government organisations can also borrow under this framework.

Recognised Lender: The lender should be resident of FATF or IOSCO compliant country. Multilateral and Regional Financial Institutions, Individuals and Foreign branches/subsidiaries of Indian banks can also be lenders.

Minimum Average Maturity Period (MAMP): MAMP will be 3 years for all ECBs. However, for ECB raised from foreign equity holder and utilised for specific purposes, as detailed in the Annex, the MAMP would be 5 years. Similarly, for ECB up to USD 50 million per financial year raised by the manufacturing sector, which has been given a special dispensation, the MAMP would be 1 year.

Late Submission Fee (LSF) for the delay in Reporting: Any borrower, who is otherwise in compliance of ECB guidelines, except for delay in reporting drawdown of ECB proceeds before obtaining LRN or Form ECB 2 returns, can regularize the delay by payment of LSF as per the laid down procedure.

4. ECB up to USD 750 million or equivalent per financial year, which otherwise are in compliance with the parameters and other terms and conditions set out in the new ECB framework, will be permitted under the automatic route not requiring prior approval of the Reserve Bank. The designated AD Category I bank while considering the ECB proposal is expected to ensure compliance with applicable ECB guidelines by their constituents. Any contravention of the applicable provisions will invite penal action or adjudication under the Foreign Exchange Management Act, 1999.

5. Lending and borrowing under the ECB framework by Indian banks and their branches/subsidiaries outside India will be subject to prudential guidelines issued by the Department of Banking Regulation of the Reserve Bank. Further, other entities raising ECB are required to follow the guidelines issued, if any, by the concerned sectoral or prudential regulator.

6. The amended policy will come into force with immediate effect.

Detailed notification can be refrred here: NOTIFICATION

RBI/2018-19/109  A.P. (DIR Series) Circular No. 17

[Notification Dated: 16-01-2019]

Reserve Bank of India

Tweet

The post External Commercial Borrowings (ECB) Policy – New ECB Framework appeared first on SCC Blog.

External Commercial Borrowings (ECB) Policy – New ECB Framework published first on https://sanantoniolegal.tumblr.com/

[legalseat]

RBI’s Amendment to the Hedging Policy for ECBs: Reasoning and Impact

[Saher Fatima and Siddharth Tandon are III year students at the National Law University, Jodhpur]

Introduction

Over the years, external commercial borrowings (“ECB”) have become a preferred source of finance for Indian entities. ECBs refer to commercial loans in the form of bank loans, securitized instruments, buyers’ credit or suppliers’ credit availed of from non-resident lenders with a minimum average maturity period of three years. There exist three tracks through which loans can be raised by the way of ECBs: Track 1 are medium-term foreign currency denominated ECBs with minimum average maturity of three to five years; Track II are long-term foreign currency denominated ECBs with minimum average maturity of 10 years; and Track III are rupee-denominated ECBs with minimum average maturity of three to five years.

In order to address the currency risk, the Reserve Bank of India (“RBI”) in 2016 made it mandatory for the Indian borrowers to “hedge” ECBs completely. Hedging can be understood as an investment mechanism in order to lessen the adverse price movements in a loan, debt or an asset. Recently, the RBI eased the mandatory hedge coverage with the intention of boosting the declining number of companies opting for ECBs. The RBI reduced the mandatory hedge coverage from 100% to 70%. In this post, the authors discuss the importance of ECBs for Indian firms in the present scenario, largely focusing on the reasoning behind such a change, and the impact it will have on the Indian economy in the near future.

Importance of ECBs

ECBs are governed by sub-section 3(d) of Section 6 of the Foreign Exchange Management Act, 1999 along with various regulations issued by the RBI over the years. ECBs have been the largest component of total external debt in India for past many years now. Presently, ECBs have a 37.8% share of the total external debt, followed by NRI deposits at 24.2% and short-term trade credit at 18.8%. ECBs rose to almost two-fifths of the total external debt by gaining more than 11 percentage points over the last 8 years. This portrays the importance of ECBs, not only for the private companies (which comprise almost four-fifths the total debt), but for the governmental entities as well.

There are various benefits for a firm that chooses ECBs as a source of borrowings. Lower rate of interest in foreign countries is one of the most significant factors, along with diversified investor base and exposure to global opportunities. In order to lower its current account debt, the RBI has to ensure that the Indian entities gain from these benefits. As a result, it becomes the duty of the RBI to make sure that Indian companies are properly incentivised they will opt for ECBs rather than any other form of borrowing.

Reasons behind the Change

After facing a decline of about 2.8% over the previous quarter, India’s total external debt stood at $514.4 billion at the end of June 2018. The external debt may be denominated in any currency, be it rupee or any other foreign currency. In reality, the American dollar constitutes the largest component of India’s external debt with a share of 50.1%, followed by the Indian rupee at 35.4%.Thus, it is easily understandable that any kind of fluctuations or change in regulations affecting these two currencies will have a direct impact on companies transacting in ECBs or deciding whether to go for ECBs or not.

In recent times, we have witnessed a substantial change of factors and subsequent fluctuations in both these currencies. These changes have resulted in an unfavourable situation for the Indian borrowers, be it with respect to the dollar or the rupee. The change in dollar is because of the recent revisions of the rate cycle undertaken by the US Federal Reserve. On September 26 this year, the Federal Reserve increased its benchmark rate to a range between 2% and 2.25%. The interest rate which was 1.50% at the beginning of the year has come to this figure after the three rate revisions that the Federal Reserve has carried out. Jerome H. Powell, Chairman of Federal Reserve, has specifically mentioned that one more increase in the interest rate can be expected before the end of 2018. Any form of change in interest rates directly impacts the cost of federal borrowings and cost of hedging. Because of these subsequent changes, companies in India have begun to find it difficult to borrow by the way of ECBs as, along with interest rates, the cost of hedging has gone up.

The depreciation in the rupee has also resulted in problems for Indian borrowers. Rupee has become the worst performing Asian currency in 2018, losing more than 10% of its value, in comparison with the previous year. The Indian rupee which is 72.50 per dollar, as of this month, stood at 64.4 a year back. This slow but constant decline in the value of rupee has shown its impact by forcing the Indian companies to review their hedging strategies.

Impact

Due to higher inflation, lower exchange rate volatility, and a higher credit to GDP ratio external commercial borrowing is a dominant phenomenon in emerging market economies like India.[i] Moreover, due to the hedging requirements, firms tend to choose foreign currency debt when they have foreign income or foreign assets working as a natural hedge. Similarly, lenders have incentives to lend in foreign currency to firms that better tolerate exchange rate volatility. However, sometimes RBI intervention is necessary to secure the domestic market from exchange rate volatility. This in turn depicts the rationale behind the mandatory 100% hedging provision for external commercial borrowings.

As already mentioned, the RBI has recently reduced the mandatory hedging provision from fully-hedged to 70%. This will result in reducing the borrowing cost. Earlier, the difference in interest rates of a foreign currency loan and a domestic currency loan made the former cheaper as well as attractive. But, due to the mandatory hedging provision, the costs of borrowings increased, resulting in the creation of extra burden for the borrowing entities. Prima facie, it is quite clear that, as the costs have decreased, the situation has become more advantageous for the Indian firms. But this moves comes with certain drawbacks.

One of the major disadvantages is that it will expose Indian firms to a much bigger risk, i.e. the exchange rate risk. The lesser the borrowings being hedged, the more the chances of facing a higher debt burden, in case of depreciation of the local currency. Due to this currency mismatch there is a higher chance of default with additional negative consequences for firms. The negative impact on the investments of the firm was evidenced in a study carried out in Mexico in the 2005, which stated that “firms which have heavy short term foreign debt exposure had substantially lower investments after a large devaluation”.[ii]

Further, due to the increase in chances of default, the change in provision may result in making the lenders wary of providing loans to the Indian firms. This change might also lead to a disadvantageous situation for the consumers. This means that the firms, which are now unhedged for the remaining 30%, may face higher debt costs as a consequence of depreciation in the rupee. As a result, the firms may try to shift these additional costs onto the consumers, which may not always be possible in Indian market because of the high level of competitiveness. This will in turn force the firms to go for other forms of borrowings, which makes this situation a bit adverse for the borrowing firms as well.

Conclusion

The recent steps taken by the RBI, such as reducing the average maturity requirement for ECBs in infrastructure space from 5 years to 3 years, reducing the average maturity requirement for exemption from hedging from 10 years to 5 years, along with the thoroughly discussed change of reducing the mandatory hedge coverage, are all steps in the right direction. Though the changes of decreasing the maturity requirement can be termed as having no or very trivial disadvantages, the change of reducing hedge coverage does suffer with some serious drawbacks which may result in creation of problems in the future, as discussed in depth.

These recent steps make it crystal clear that RBI knows that ECBs are of utmost significance for future development of Indian economy. But with the plummeting rupee and an expected change in the rate by the US Federal Reserve in the near future, a change in hedging provision cannot be termed as the best solution.

The unexpected resignation of Dr. Urjit Patel from the post of Governor of RBI has added to the already existing problems, with the rupee facing even more pressure. At a time like this, Indian entities are expected to become even more careful before entering into any kind of foreign transactions. Thus, in the absence of proper steps taken by the RBI, the situation relating to ECBs may worsen.

Saher Fatima & Siddharth Tandon

[i] Sebastian Galiani, Eduardo Levy Yeyati and Ernesto Schargrodsky, “Financial dollarization and debt deflation under a currency board,” Emerging Markets Review, 2003, 4 (4), 340–367.

[ii] Mark Aguiar, “Investment, devaluation, and foreign currency exposure: The case of Mexico,” Journal of Development Economics, 2005, 78 (1), 95–113.

The post RBI’s Amendment to the Hedging Policy for ECBs: Reasoning and Impact appeared first on IndiaCorpLaw.

RBI’s Amendment to the Hedging Policy for ECBs: Reasoning and Impact published first on https://divorcelawyermumbai.tumblr.com/

[loyallogic]

Legal Framework Regulating Foreign Contribution To Start-ups In India

This article is written by Karan Jayesh Shah, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “Legal Framework Regulating Foreign Contribution To Start-ups In India”.

Introduction

Start-ups in India are governed by multiple laws. Compliances to the regulation and procedure are must and non-compliances would attract heavy penalties. Start-ups are the future and backbone of the Indian economy. It can be incorporated in various forms such as a company, partnership firm, one person company, limited liability partnership etc. 

The Government of India has come up with a comprehensive policy on encouraging start-ups in India through various policies and regulations like Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations 2000, Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000, Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations 2000 of the RBI, The foreign direct investment (FDI) policy issued from time to time by the Department of Industrial Policy and Promotion (DIPP), etc.

Foreign Contribution (Regulation) Act, 2010

The FCRA, 2010 is an Act of the parliament of India and has come into effect from May 1, 2011. The Purpose of the Act is to regulate the acceptance and utilisation of foreign contribution and foreign hospitality in certain cases. The Act comprises of nine chapters with 54 sections and is applicable to whole of India and even to citizens of India outside India.

It is true that many political parties in India get financial support from foreign country. Sometimes, the support is obtained through some social or apparently non-political organisation. It is also true that some countries provide contribution or hospitality to person at senior level, so that these persons can look after interest of these countries in India. Obviously, this is not in the interest of nation and hence the purpose of the act is to prevent such contribution and hospitality at high places.    

The Ministry of Home Affairs has also issued a Gazette Notification dated the 29th April, 2011 notifying the Foreign Contribution (Regulation) Rules, 2011 made under section 48 of FCRA, 2010. 

Foreign Contribution [Section 2(1)(h)]

Foreign Contribution means the donation, delivery, or transfer made by any foreign source,–

of any article excluding any article given as a gift for personal use and value of the gift does not exceed then what may be specified from time to time by the Central Government;

of any Currency; and

of any foreign security 

The following are the exception that will not be covered under the definition of foreign contribution: 

Receipt of fees to be paid to universities or institutions; 

Payment for cost of goods and services; (in the ordinary course of business) 

Money received as an agent of foreign source in India.

Salient Features of the Act

Permission granted as per the old act will be valid for the period of five years after the enactment of newly Foreign Contribution Regulation Act, 2010.

Many provisions of the repealed FCRA, 1976 are incorporated in the newly enacted act .i.e. FCRA, 2010. 

A company engaged in the Information broadcasting and political organisations have been placed in the category prohibited to accept foreign contribution.

The Person who has the right to receive foreign contribution can’t transfer it to another person who is not authorised or have the right to receive the contribution as per the FCRA, 2010.

The Foreign Contribution must be utilised only for the purpose for which it has been received and 50% of the contribution can be used for administrative expenses and above that with the permission of the central government.

In the newly enacted Act, the provision for suspension and cancellation of the registration granted to organisation, association or company for violation of the provisions of the act and rules is given. In the repealed act, provision for above mention point was not given. 

Under the newly enacted Act, the registration certificate will be valid for the period of 5 years for accepting the foreign contribution and must be renewed within 6 months before the expiry of the period of the registration certificate and under the repealed act there were no provisions for the time limit of the registration certificate.

A separate account shall be maintained by the company and no fund other than foreign contribution shall be deposited in that account and it is the duty of the bank to submit periodic report of the account to the concerned authority. 

Provisions for maintaining the account as per the law is given and non-compliance or failure to furnish the account for inspection would attract retribution.

Any person, who knowingly and intentionally give false imitation or statement and seeks registration by means of fraud, misrepresentation, shall be liable to imprisonment for a term which may extend to six months or fine or with both.

Salient Features of the Rules

The Foreign Contribution (Regulation) Rules, 2011 have defined the activities that need to be treated as speculative activities. 

The Rules have also specified expenditure, which amounts to “Administrative Expenses”.

Procedure for submission of application for obtaining registration or prior permission to receive foreign contribution has been given in detail. 

The submission of application fee for obtaining registration or prior permission for receiving foreign contribution would be Rs. 2000/- and Rs. 1000/- respectively.

Any pending application under the repealed act shall be deemed to be an application made under the new rules, subject to payment of the prescribed fee.  

A separate set of accounts and records, shall be maintained by the person who has been granted registration or prior permission for the receiving and utilisation of foreign contribution. 

The certificate of registration shall be valid for the period of 5 years for accepting the foreign contribution and must be renewed within 6 months before the expiry of the period of the registration certificate.  

If the certificate of registration is cancelled then the amount of foreign contribution lying unutilised in the person’s account would vest with the bank authority till the central government issue further directions.

Foreign investment: Compliance under the Reserve Bank of India/ Foreign Exchange Management Act

India after liberalizing and globalizing the economy to the outside world in 1991, witnessed an enormous increase in the flow of foreign direct investment. The Government of India took the task of transforming India into a manufacturing power through the ‘Make in India’ campaign launched on September 25, 2014. A national program designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure.

There are two routes to Foreign Direct Investment (FDI), namely, Government Route where the prior approval of Reserve Bank of India, concerned ministries/ authorities/ department and Central Government via a single window – Foreign Investment Facilitation Portal (FIFB) administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India is required and carried out and Under Automatic Route there is no need to get the permission of Reserve Bank of India. However, Individuals or entities of Bangladesh and Pakistan can invest only through Government Route only. 

Click Above

Apart from the specified 17 sectors viz. Defence, Food Product Retail Trading, Satellites- establishment and operation, Telecom Services, Pharmaceutical – Brownfield, Banking- Private and Public Sector, Private Security Agencies, for which Government approval is mandatory, DIPP will have the responsibility to identify the concerned authority applicable to particular application, where the applicable ministry is in doubt. DIPP also handles the proposals from the Export Oriented Units and NRIs applications relating to issues of equity for import of capital goods/equipment, pre-operative/pre-incorporation expenses, etc.  

Subject to conditions and sectoral caps on ownerships, various categories of foreign investors like Foreign Portfolio Investors, Foreign Institutional Investors, Foreign Venture Capital Investor, and Non-Resident Indians can hold stakes in Indian business entities. 

FDI is a capital account transaction and any violation of its regulations attracts penal provisions under FEMA. RBI administers FEMA and Directorate of Enforcement, Ministry of Finance – Government of India has the authority to investigate in case of any violation of its rules.

Concerned Administrative Ministries/Department/Authorities

The sector that falls under the Government Route needs the approval for foreign investment under the present FEMA Regulations and FDI Policy from the concerned ministries, department, and authorities applicable to them.

Ministry of Mines;

Department of Defence Production, Ministry of Defence;

Ministry of Home Affairs; 

Ministry of Information and Broadcasting; 

Ministry of Civil Aviation; 

Department of Space;

Department of Telecommunications; 

Department for Promotion of Industry and Internal Trade; 

Department of Economic Affairs; 

Department of Financial Services; 

Department of Pharmaceuticals. 

Conclusion

In the wake of the emergency in 1970’s the Foreign Contribution Regulation was enacted in 1976. The legal framework pertaining to Foreign Contribution has gone through various changes since its inception in 1976. The FCRA, 2010, not only regulates the acceptance of foreign contribution but also lays down regulations for its utilisation. It defines foreign contribution under section 2(h) of the Act by means of donation, delivery or transfer by any foreign source of any articles, currency or securities. The main objective of the contribution or the funds raised under FCRA is that it can be used for social activities and that it cannot be used for personal usage by the fundraisers.

Further, the regulation Act, 2010, mandates that the turnover of the NGO Etc. should be 10 lakhs which the entity should have spent in the last three years onto its aims, objectives and administration. Moreover, the legal framework regarding documents are stringent and requires the bank account to be linked with Public Financial Management system.

It prohibits acceptance of foreign contribution by any candidate for election, correspondents, columnist, cartoonist, editor, honour printer, publisher of a registered newspaper/agency, or any organisation or political parties and their office barriers, or members of any legislation association, or any company engaged in production or broadcasting of audio news or audio-visual news, or government servants under Section 3 of the FCRA, 2010. Reception of Foreign Contribution byways of wages, salaries or remuneration or by payment of ordinary course of business, or gifts are not covered under Section 3 and fall under the exception to Section 3.

Section 8 provides for regulations for utilisation of the foreign contribution by the foreign source and further, the Act provides for the Central Government to further regulate and prohibit the usage of the foreign contribution so received. 

Section 14 empowers the Central Government to cancel or revoke the certificate upon its satisfaction of utilisation being against Public policy or on grounds of misrepresentation or fraud during application or for violation of laws of the land or for using the certificate for any other purpose than for which it was granted and such person/organisation would not be eligible to re-apply for certification for 3 years from the date of cancellation.

Endnotes

Project finance in India: overview (November 10, 2019, 09:04 AM IST),

Section 2 (1)(h) of the Foreign Contribution (Regulation) Act, 2010

Salient Features of FCRA, 2010 Comes into Effect from May 1, 2011 (November 10, 2019, 7:20 PM IST),

IBID

Foreign investment: Compliance under RBI/FEMA (November 10, 2019, 10:20 AM IST),

Doing Business in India (November 10, 2019, 11:30 AM IST),

FDI Policy: Sectors where Government Approval is required (November 11, 2019, 9:30 AM IST)

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

The post Legal Framework Regulating Foreign Contribution To Start-ups In India appeared first on iPleaders.

Legal Framework Regulating Foreign Contribution To Start-ups In India published first on https://namechangers.tumblr.com/