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Master Circulars Issued by the RBI – Highlights

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Shruti Priya

The Reserve Bank of India (RBI) on 1 July 2011 issued the updated Master Circulars compiling the regulatory framework and instructions formulated by RBI under various circulars and notifications. The Master Circulars are issued with a sunset clause of one year and will stand withdrawn on July 1, 2012. The highlights of the changes brought in by the present Master Circulars are as following:



Master Circular No. 15/2011-12Master Circular on Foreign Investment, 2011  (“Circular”)



Changes reflected in the consolidated FDI Policy: 

Provisions pertaining to OCB’s:






Pricing Guidelines









Mode of payment






 Form FC GPR:


Investments in Trust:



 NRI Investments:

















Pledge of Shares held by NRs to AD Bank in India or overseas Bank:




Issue of equity against import of capital goods etc.:





FVCI cannot buy through private arrangement with a third party:


  • The deletion of Press Note 1(2005) from the consolidated FDI policy has been reflected in the circular.
  • The option to fix the numerical price  or the conversion formula upfront, while issuing convertible instruments that mentioned in the Consolidated FDI Policy, has been provided in the Circular.
  • Erstwhile OCBs have to procure a “One Time Certification” which should state that it is not in the adverse list, before making any fresh FDI under the FDI scheme.
  • Erstwhile OCBs are not permitted to maintain any account other than NRO current account in line with the instructions as per A.P. (DIR Series) Circular No. 14 dated September 16, 2003. Further, this NRO account should not be used for any fresh investments in India.
  • In accordance to the recent introductions made by Reserve Bank of India (RBI), pricing guidelines would be applicable for issue of shares against payment of lump sum technical know-how fee / royalty or conversion of ECB into equity or capitalization of pre-incorporation expenses/import payables (with prior approval of Government).
  • For issue of Shares by SEZs against import of capital goods, a Committee must do the share valuation consisting of Development Commissioner and the appropriate Customs officials.
  • Pre incorporation expenses, Import payables or share swap can be treated as consideration for issue of shares with the FIPB approval (reflecting the introductions made by the RBI this year, in this regard).
  • Any amount debited in Indian Rupees to a non-interest bearing Escrow account in India, which is opened upon obtaining approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.
  • The definition of “Real Estate Business” has been amended to include “dealing in land and immovable property with a view of earning profit or earning income there from.”
  • RBI vide its notification no. RBI/2010-11/427 dated March 15, 2011 has discontinued the requirement to fill Part B of Form FC GPR.
  • Foreign investment in Trusts other than investment by SEBI registered FVCIs in domestic VCF is not permitted. The aforesaid reflecting in the Circular is in contradiction with the Consolidated FDI Policy, since the latter had permitted all foreign investors to invest in VCFs and not only SEBI registered FVCIs as stated in the Circuar.
  • As per the new Circular, transfer of shares from NRI to NR or NR to NRI requires the prior approval of the RBI. Earlier, transfer from NR to NRI was under the general approval route.
  • It has been clarified that NRIs can invest in non-convertible debentures both on repatriation basis and on non-repatriation basis, which has been issued by an Indian Company subject to the other terms and conditions stated under Notification no FEMA 4/2000-RB dated May 3,2000 (as amended from time to time).
  • AD Category – I banks have been given general permission to open and maintain non-interest bearing Escrow account in Indian Rupees in India on behalf of residents and non-residents, towards payment of share purchase consideration and / or provide Escrow facilities for keeping securities to facilitate FDI transactions. It has also been decided to permit SEBI authorized Depository Participant, to open and maintain, without approval of the Reserve Bank, Escrow account for securities. The Escrow account would also be subject to the terms and conditions as stipulated in A.P. (DIR Series) Circular No. 58 dated May 2, 2011. Further, the Escrow account would be maintained with AD Category I bank or SEBI Authorized Depository Participant (in case of securities account). These facilities will be applicable to both, issue of fresh shares to the non-residents as well as transfer of shares to the non-residents as well as transfer of shares from / to the non-residents
  • NRs holding shares in Indian companies can pledge these shares in favour of the AD bank in India to secure credit facilities being extended to the resident investee company for bonafide business purpose, subject to conditions set forth in the Consolidated FDI Policy.
  • NRs holding shares of an Indian company can pledge these shares in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor / non-resident promoter of the Indian company or its overseas group company, subject to conditions set forth in the Consolidated FDI Policy.
  • Issue of equity shares against Import of capital goods / machinery / equipment (including second hand machinery) Pre-Operative and Pre-Incorporation expenses, is allowed under the Government route, subject to the compliance set forth in the Circular.
  • FIIs are allowed to keep Government Securities as collaterals to the recognized Stock Exchanges in India in addition to the cash for their transactions in cash segment of the market up to the extent of USD 10 billion as opposed to the USD 5 million cap that existed before.
  • It has been clarified that FVCIs registered with SEBI cannot acquire shares via a private arrangement with a third party.
  • FIIs have been permitted to invest in “Security Receipts” issued by Asset Reconstruction Companies. The total holding by a single FII in each tranche of scheme of Security Receipts shall not exceed 10% of the issue and total holdings of all FIIs put together shall not exceed 49% of the paid up value of each tranche of scheme / issue of Security Receipts issued by the ARCs. Further, Sub –account of FIIs are not allowed to invest in the Security Receipts issued by ARCs.
Master Circular No.9 /2011-12Master Circular on External Commercial Borrowings and Trade Credits, 2011(“ECB Circular”)  Salient Features of the ECB Circular:
  • The list of eligible borrowers under the automatic route has been expanded to include lending by EXIM Bank for specific purposes.
  • Corporates in the service sectors viz. hotels, hospitals and software sectors have been allowed to avail ECBs beyond USD 100 million in a financial year under the approval route.
  • The list of eligible lenders under the approval route has been expanded to include regional financial institutions and Government owned development financial institutions.
  • Subject to the certain condition the take-out financing arrangement through ECBs, under the approval route, has been permitted for refinancing of Rupee loans availed from the domestic banks by eligible borrowers in the seaport and airport, roads including bridges and power sectors for the development of new projects.
  • It has been clarified that for All-in-Cost Ceilings of ECB under the automatic route, the swap cost should be the equivalent of the floating rate plus the applicable margin in the case of fixed rate loans.
  • Development of integrated townships (as defined under Press Note 3 of 2002 series by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, dated January 4, 2002) has been removed from the list of permitted end-use of ECB.
Master Circular No.11/2011-12Master Circular on Direct Investments by Residents in Joint Venture/ Wholly Owned Subsidiary Abroad, 2011  Performance Guarantee: 







 Corporate guarantee to step-down subsidiary of JV/WOS:








 Write –off  of Capital and Receivables:


















 Transfer by way of sale of shares of a JV / WOS:















 Transfer by way of sale of shares of a JV / WOS involving write off of the investment:






Annual Performance Report:

  • Only 50% of the aggregate amount of performance guarantees issued by the Indian company to or on behalf of the overseas JV/ WOSwould be included for computing the financial commitment to JV/WOS overseas, within the overall limit of 400% of the net worth of the Indian party as on the date of the last audited balance sheet.
  • The time specified for completion of the contract would be considered as the validity period of the related performance guarantee.
  •  The Indian investor should seek Reserve Bank of  India (“RBI”) approval before remitting funds from India on account of an invocation of guarantee which is in excess of the ceiling limit of 400 per cent of its net worth.
  • The Indian party is permitted to extend corporate guarantee on behalf of the first generation step-down operating JV/WOS set up by their JV/WOS under the automatic route, within the prevailing limit for overseas direct investment, irrespective of whether the direct subsidiary is an operating company or a special purpose vehicle (“SPV”). The extant regulations provided for the Indian parties to issue corporate guarantees on behalf of their step down JV/WOS only if they were operating subsidiaries. Such guarantees should be reported to the RBI in Form ODI through the AD Category-I Bank. The Indian party may also issue corporate guarantee on behalf of second generation or subsequent level step-down operating subsidiaries under the approval route, provided it directly or indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued.
  • Indian parties who have set up a WOS abroad or have at least 51% stake in an overseas JV, are permitted to write off capital (equity/preference shares) or other receivables, such as loans, royalty, technical know-how fees and management fees in respect of the JV/WOS, even while such JV/WOS continue to function.  Under the extant regulations, such a restructuring of the JV’s/WOS’ balance sheet was permitted only when, (i) the overseas entity was being wound up, or (ii) when divesting the stake in the overseas entity.

The write-off/restructuring shall be carried out as under:

  1. Listed Indian companies are permitted to write-off capital and other receivables up to 25% of the equity investment in the JV/WOS under the automatic route; and
  2. Unlisted companies are permitted to write-off capital and other receivables up to 25% of the equity investment in the JV/WOS under the approval route.

The Indian party shall submit the following documents along with the application for applications to the designated AD Category –I bank (“Designated Bank”):

  1. Certified copy of the balance sheet reflecting the losses suffered by the overseas WOS/JV; and
  2. Projections for the next 5 years indicating benefit accruing to the Indian party consequent to such write off / restructuring.

The write-off/restructuring shall be reported to the RBI via the Designated Bank within a period of 30 days of write off or restructuring.

  • Indian party may transfer his shares in the JV/WOS abroad to another Indian resident, eligible under the FEMA regulations, or to any person resident outside India under the automatic route subject to the following conditions:
  1. Sale should not result in write-off of any investment made;
  2. Sale should be through the stock exchange where the shares are listed;
  3.  If the shares are unlisted and are being divested through a private arrangement, the price of such shares should not be less than the fair value as certified by the chartered accountant;
  4. The Indian party should not have any outstanding dues such as dividend, technical know-hoe fees, royalty, export proceeds from the JV/WOS, etc;
  5. The JV/WOS should have been in operation for a minimum of 1 year;
  6. The annual performance reports and the audited accounts of the JV/WOS should have been duly filed with the RBI;
  7. No investigation pending against the Indian party by any regulatory authority in India
  •  Details of the sale have to be filed with the RBI through the Designated Bank within 30 days of sale.
  • In the following instances and in addition to conditions (b) to (g) mentioned above , general permission is granted to the Indian party to divest his shares in the JV/WOS abroad when the amount repatriated after disinvestment is less than the original amount invested:
  1. JV / WOS is listed in an overseas stock exchange;
  2. the Indian party is listed on a stock exchange in India and has a net worth of not less than Rs.100 Crore;
  3. the Indian party is unlisted and the overseas investment does not exceed USD 10 million;
  4. the Indian party is a listed company with a net worth of less than Rs.100 Crore but investment in the overseas JV/WOS does not exceed USD 10 million
  • The annual performance report, certified by the statutory auditor of the company, has to be filed with the RBI within 3 months of closing of the annual accounts.
Master Circular No.03/2011-12Master Circular on Establishment of Branch/Liaison/Project Offices in India by Foreign Entities, 2011 Highlights of Modifications and changes to the policy: 
  • Due date for filing the Annual Activity Certificate (“AAC”) with the designated category I bank has been extended from April 30 to September 30.
  •  It has been clarified that if the annual accounts are finalized with reference to a date other than March 31, the AAC along with the audited balance sheet may be submitted within 6 months from the due date of the balance sheet.



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