A.P (DIR Series) Circular No. 44
December 8, 2003

To

All Authorised Dealers in Foreign Exchange

Madam/Sirs

Attention of Authorised Dealers is invited to A.P.(DIR Series) Circular No. 14 dated September 16, 2003 conveying the decision to derecognise the Overseas Corporate Bodies (OCBs) in India as an eligible 'class of investor' under various routes/schemes available under extant Foreign Exchange Management Regulations.

2. In this connection, in exercise of the powers conferred under Section 6 read with Section 47 of the Foreign Exchange Management Act, 1999, the Reserve Bank has issued Foreign Exchange Management [Withdrawal of General Permission to Overseas Corporate Bodies (OCBs)] Regulations, 2003 which are notified vide Notification No. FEMA 101/2003-RB dated October 3, 2003. The facilities for OCBs under various Foreign Exchange Management Regulations thus stand withdrawn. A copy of the said Notification is enclosed.

3. In order to address various operational issues associated with the exit arrangements for OCBs, FAQs to illustratively deal with these issues has been placed on RBI web-site for the information of all concerned (copy enclosed).

4. Authorised Dealers may bring the contents of this circular to the notice of their constituents and customers concerned.

5. The directions contained in this circular have been issued under Sections 10 (4) and 11 (1) of the Foreign Exchange Management Act, 1999.

Yours faithfully

Derecognition of OCBs

Overseas Corporate Bodies (OCBs) have been derecognised as a class of investor entity in India with effect from September 16, 2003. In this connection, Reserve Bank has issued directions to the Authorised Dealers in terms of A.P (DIR Series) Circular No. 14 dated 16th September 2003 and has made Foreign Exchange Management [Withdrawal of General Permission to Overseas Corporate Bodies (OCBs)] Regulations, 2003, which have been notified vide Notification No. FEMA 101/2003-RB dated October 3, 2003.

In order to address various operational issues associated with the transitional arrangements for OCBs, for the information of all concerned, FAQ has been prepared on the following topics:

I. General
II. Investment in shares/convertible debentures and other securities
III. Portfolio Investment Scheme

While these FAQs seek to cover the broad spectrum of operational issues, in case there are other issues to be resolved a reference may be made to the Chief General Manager, Foreign Investment Division, Exchange Control Department Reserve Bank of India Central Office Mumbai.

A.1. Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least sixty per cent by Non-Resident Indians and includes overseas trust in which not less than sixty percent beneficial interest is held by Non-resident Indians directly or indirectly but irrevocably, which was in existence as on September 16, 2003 and was eligible to undertake transactions pursuant to the general permission granted under Foreign Exchange Management Regulations.

A.2. These regulations are applicable to those OCBs who as on September 16, 2003 were availing of facilities under various Foreign Exchange Management Regulations to invest in India under various schemes/routes. Illustratively, an OCB could have -

a) invested in shares/convertible debentures of an Indian company under Foreign Direct Investment Scheme through Government Route/Automatic Route of RBI on repatriation and non-repatriation basis, or

b) invested in shares/convertible debentures of an Indian company on repatriation and non-repatriation basis under Portfolio Investment Scheme, or

c) invested in securities other than shares and convertible debentures of an Indian company on repatriation and non-repatriation basis, or

d) held Savings/Current/Recurring/Fixed Deposit account under NRO Account Scheme, NRE Scheme, FCNR(B) Account Scheme with authorised dealer/authorised bank, or

e) held in deposits with a company incorporated in India (including a non-banking finance company registered with RBI), or a proprietorship concern, or a partnership firm on non-repatriation basis, or

f) invested in Non Convertible Debentures (NCDs) on repatriation and non-repatriation basis of a company incorporated in India, or

g) lent in foreign currency to a person resident in India.

A.3. Yes. Such non-resident incorporated entity is treated like any other foreign incorporated company. An eligible non-resident incorporated entity having major holdings by NRIs, which as on September 16, 2003 did not avail of any of the facilities as indicated at (a) to (g) in answer (2) above, may invest in Indian companies in terms of Regulation 5(1) of RBI Notification No.20/2000-RB dated May 3, 2000 under FDI Scheme through Government Route / Automatic Route of RBI..

A. 4. No. Only those entities which are incorporated or registered under the relevant statutes, laws of the host country would be eligible for investment under FDI Scheme after September 16, 2003.

A.5. OCBs who as on September 16, 2003 availed of any of the facilities as indicated at (a) to (g) in answer no. 2 above are not permitted to make fresh investments in terms of Notification No. FEMA 101/2003-RB dated October 3, 2003. However, such of those entities which are incorporated and are not under adverse notice of RBI will be considered, for undertaking fresh investments, as incorporated non-resident entities in terms of Regulation 5(1) of RBI Notification No.20/2000-RB dated May 3, 2000 under FDI Scheme with the prior approval of Government if the investment is through Government Route and with the prior approval of Reserve Bank if the investment is through Automatic Route on case by case basis.

A. 6. Yes; as the amount has been received in the country prior to 16.9.2003 OCBs may be allotted the shares/convertible debentures but the matter should be reported top the RBI by the Indian company through a separate report. On a scrutiny if the RBI were to find that the entity is ineligible from the FDI angle or is in the adverse notice of RBI or SEBI or any other regulator, suitable action could be initiated by the RBI.

A. 7. Yes and the matter reported to the RBI by the Indian company. On a scrutiny if the RBI were to find that the entity is ineligible from the FDI angle or is in the adverse notice of RBI or SEBI or any other regulator, suitable action could be initiated by the RBI.

A. 8. Yes, provided the Indian company obtains the FIPB/SIA specific approval for receiving the remittance from the OCB towards allotment of shares.

A. 9. Yes, with the specific approval of FIPB/SIA followed by RBI approval.

A. 10. OCB may transfer the shares held by it by way of sale to NRIs in terms of Regulation 5(2) (b)(i) of RBI Notification No. FEMA 101/2003-RB dated October 3, 2003. OCB may seek prior permission of FIPB/SIA and RBI for transfer of shares held by it by way of sale to a person resident outside India, other than a NRI. OCB may transfer the shares held by it by way of sale to a Resident in terms of Regulation 10 of RBI Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.

A. 11. No. OCB cannot transfer shares by way of sale to another OCB.

A. 12. Yes. On conversion of the existing holdings of ADR/GDR into underlying shares, the same may be treated as continuance of OCB's existing right to hold the shares. (RBI has already prohibited OCBs from accessing the Two-way fungibility route).

A. 13. No fresh issue of ADRs/GDRs to OCB is permitted as they are derecognised as a class of investor.

A. 14. Yes.

A. 15. Yes. However, if the renouncee is an entity reckoned as OCB (refer to Answer No.2) the Indian company may seek specific approval of the FIPB/SIA in case of investments under the Govt Route or specific approval of RBI in case of investments under Automatic route.

A. 16. No. Bonus shares are deemed as deferred dividend and since OCBs are permitted to hold their existing investments; bonus shares accruing to them can be allotted, in terms of Regulation 6A of Notification No. FEMA20/2000-RB dated May 3, 2000, as amended from time to time.

A. 17. Yes. OCBs can continue to hold Government dated securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds in India or National Plan/Savings Certificates both on repatriation and non-repatriation basis till they are sold/redeemed. On redemption of the proceeds , the amounts may be repatriated abroad if the investments were held on repatriation basis while in case of investments held on non-repatriation basis, the amount may be credited to NRO current account.

A. 18. A merger or de-merger or restructuring proposal which impacts on the capital structure of a company could be on account of (a) merger of two companies, (b) de-merger of an existing company and (c) restructuring of the capital of company under rehabilitation scheme approved by BIFR/Court/under CDR mechanism.

These cases may lead to acquisition of fresh shares by the existing OCBs. In case of (a) and (b) there may not be fresh inward remittance and therefore such acquisition may be treated as existing holding which OCBs may continue to hold. In case of (c) there may be fresh inflows and therefore OCBs may seek approval of Govt./RBI (for investment as the non-resident company).

A. 19. Since the amount has already been received in full/partly in the country prior to 16.9.2003 OCBs may be allotted the shares/convertible debentures, subject to report to RBI.

A. 20. An OCB may continue to hold the shares purchased under PIS till such time they are sold on a recognised stock exchange.

A. 21. Due process should be followed in closing the accounts expeditiously. Some amount of time for clearing of cheques in transit especially for statutory payments would be required. However, no fresh transaction shall be permitted.

A. 22. Yes. The existing NRE Term Deposit/Recurring Deposit /FCNR(B) deposit accounts can be held till maturity. On maturity, the maturity proceeds shall be repatriated only to the OCB concerned. The existing NRO term deposit can be held till maturity and on maturity, the maturity proceeds should be transferred to NRO Current Account.

A. 23. The existing NRO (Savings) Account of OCBs shall be converted into NRO (Current) Account.

A. 24. No. However, ADs may with the specific prior permission of RBI open a new NRO (Current) Account for OCBs for specific purpose of unwinding of the existing investments.

A.25. No. Any loan or any other facility granted against the security of a Recurring/Fixed Deposit Account held in the name of an OCB cannot be renewed and shall be closed by adjustment of the proceeds on maturity of the deposit. If the balance of the deposit proceeds is inadequate to adjust the loan outstanding, a fresh inward remittance /local credits will be required to close the same

A. 26. No. A deposit accepted on non-repatriation basis by an Indian company (including NBFC registered with RBI), or a proprietorship concern, or a partnership firm in India from an OCB shall not be renewed on becoming due, and no interest thereon shall accrue after it falls due for repayment.

A.27. No person resident in India shall borrow from or lend to an OCB in foreign currency or in Rupees. Further, where any borrowing from or loan to an OCB, whether in foreign exchange or in Rupees made in accordance with Foreign Exchange Management Regulations as applicable was outstanding on September 16, 2003, such borrowing or loan shall not be renewed on becoming due, and no interest thereon shall accrue after it falls due for repayment.

A. 28. An OCB may enter into a forward contract with rupee as one of the currencies with an AD in India to hedge (i) the amount of dividend due to it on an existing investment in the form of shares of an Indian company, (ii) the balances held in an existing FCNR(B) account or NRE (Term Deposit) account, (iii) the amount of existing investment made under Portfolio Investment Scheme and (iv) the amount of investments made under Foreign Direct Investment Scheme since January 1, 1993.

In exercise of the powers conferred by clauses (b), (d), (e) and (f) of sub-section (3) of Section 6 read with Section 47 of the FEMA, 1999 (42 of 1999) and all other powers available to it in this behalf, the Reserve Bank of India makes the following Regulations:-

1. (1) These Regulations may be called Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs)) Regulations, 2003.

   (2) They shall come into force from the date of their publication in the Official Gazette.

2. For the purpose of these Regulations -

3. These Regulations seek to withdraw the general permission to Overseas Corporate Bodies (OCBs) to undertake transactions in terms of such permission granted under the Regulations and shall be construed accordingly.

4. Notwithstanding anything contained in any other Regulations, these Regulations shall prevail.

5. On the commencement of these Regulations -

1. a) no fresh account by whatever name called shall be opened or maintained in the name of an OCB.

1. all local payments in rupees;

2. remittance outside India of current income in India of the account holder net of applicable taxes;

2. a) no investment in any security shall be made by an OCB;

3. a) no person resident in India shall borrow from, or lend to, an OCB either in foreign exchange or in Rupees;

6. An OCB may enter into a forward contract with rupee as one of the currencies with an Authorised Dealer (AD) in India to hedge -

1. the amount of dividend due to it on an existing investment in the form of shares of an Indian company;

2. the balances held in an existing Foreign Currency Non-Resident (FCNR) account or Non-resident External Rupee (NRE- Rupee) Term Deposit account;

3. the amount of existing investment made under Portfolio Investment Scheme in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 or under the notifications issued there under or made in accordance with the provisions of the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000, and in both cases subject to the terms and conditions specified in the proviso to paparagraph 1 of Schedule II to The Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000, as amended from time to time. -