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Our Bureau

Mumbai, Dec. 16 The Reserve Bank of India has detected and plugged a loophole in FEMA (Foreign Exchange Management Act) regulations which some Indian companies were exploiting to raise funds abroad and bring to India.

The regulations are related to repayment of advances that are paid by overseas investors to Indian companies for allotment of shares under automatic FDI route. Under these regulations, while Indian companies are allowed to receive advance payment from NRIs and overseas investors, no time limit was stipulated for issue of shares or refund of the amount.

Taking advantage of this loophole, companies instead of allotting shares use the advance money for other purposes and refund it after two to three years, giving some vague reasons.

According to banking sources, a number of unlisted companies, particularly in the real-estate sector, have been receiving funds from overseas investors as advance payment for issue of shares or convertible debentures through the automatic route under the FDI policy. Some companies have received large sums since the RBI restricted external commercial borrowing, said the sources.

As interest cannot be paid on such refunds, companies use other methods to compensate the lender, said a banking source. Some unlisted companies issue small portion of their equity, in lieu of interest, to the overseas investors at lower prices, and refund the balance amount.

On Friday, through a circular to banks and authorised foreign exchange dealers, RBI has plugged this loophole, stipulating that companies receiving funds from abroad as advance payment for allotment of equity shares or debentures should issue the instruments to investors within 180 days.

“...The matter has been reviewed in consultation with the Government and it has been decided that, with effect from November 29, 2007, the equity instruments should be issued within 180 days of the receipt of the inward remittance. In case, the equity instruments are not issued within 180 days from the date of receipt of inward remittance... the amount should be refunded immediately to the non-resident investor...”

RBI has also asked companies to give details of advance received in cases where shares and debentures were not issued within six months after receiving the funds.

RBI has said that when equity instruments are not issued within 180 days of receipt of inward remittance, the money should be refunded immediately to the non-resident investor by outward remittance through normal banking channels.

In its circular, RBI also said it may consider the refund of the amount outstanding beyond 180 days from the date of receipt based on the merits of the case.

In cases where, as on November 28, 2007, 180 days have elapsed since receipt of funds and the equity instruments have not been issued, the companies have to inform RBI about a definite plan of action either for allotment of equity instruments or for refund of the advance, the RBI note said.

More Stories on : RBI & Other Central Banks | Forex | Foreign Direct Investment

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