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Foreign Investment Regulations

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Foreign Investment Regulations

Current Account Convertibility

Under the present policy all receipts of foreign exchange under the current account both export earnings and inward receipts are fully convertible. As per the present policy of the Government all receipts of foreign exchange, under current transactions, both merchandise exports and invisible receipts, received by exporters and other recipients are required to be surrendered to an authorised dealer of foreign exchange.

The authorised dealer converts 100% of the foreign exchange received into rupee at the free market.

In respect of export contracts entered into by exporters on CIF or C & F basis, the authorised dealers are required to obtain documentary proof of freight and insurance charges actually paid by the exporter, whether in foreign currency or rupees (to be notionally converted into foreign exchange at market rate for this purpose) and deduct this amount from the CIF value of exports to arrive at the FOB value of exports. The conversion of foreign currency into Indian Rupees is done on the basis of FOB value of Exports.

From the free convertible portion, the exporters of goods and services have the option to retain upto 25% of the foreign exchange in Dollar Accounts, also called EEFC Accounts, with some commercial bank in India which is an authorised dealer of foreign exchange, to meet their current or contingent liability, and get only 75% of the foreign exchange converted into rupees at free market rates. However, as has been exempted before, all the 100% Export Oriented Units and Units set up in the Export Processing Zones / Free Trade Zones are allowed to get their entire proceeds from exports converted at market rates quoted by authorised dealers.

For the import of raw materials, components, capital goods, etc and for remittance of dividends, royalties, technical know-how fee, repayment of overseas foreign exchange loans and/or interest therein, the foreign exchange has to be purchased by the remitter at market determined rates from the authorised dealers of foreign exchange in India.

For the requirement of foreign exchange for any of these purposes, an application to the regional Exchange Control Department of RBI, under whose jurisdiction the unit is located, has to be made and permits have to be obtained.

Indian exporters/importers can make payments towards freight charges in respect of their exports/imports in a convertible foreign currency to steamships/airline companies operating in India or to their Indian Agents. Such payments can be made either from their foreign currency accounts or by purchases of foreign exchange from authorised dealers at market rates quoted by them. It is open for Indian/Foreign Shipping lines/Airlines to open and maintain foreign agency accounts (EEFC accounts) and to credit up to 25% of the collections of the freight in foreign currencies to such accounts.

As all payments for deemed exports are settled in rupees, they are outside the purview of Liberalised Exchange Rate Mechanism (LERMS).

All foreign currency loans raised by Indian firms/Companies are converted into rupees at market rates. All remittances towards repayment/payment of principal/interest under commercial borrowings, supplier's credit, buyer's credit, lines of credit, etc and other incidental expenses connected therewith are also made at market rates.

The RBI also permits Indian parties who have raised foreign currency loans abroad to open ESCROW accounts with banks abroad and to assign the credit balance outstanding therein favour or the lenders. Such accounts can be funded through export earnings of the borrower to the extent permitted by the Reserve Bank of India.

Any surplus inflows from these accounts into India are converted at market rates by their authorised dealers.

Any foreign exchange received by Indian companies towards foreign equity contribution is converted at market rates. If the foreign equity contribution is retained abroad, with the permission of the RBI, to finance import of capital goods, the unspent balance repatriated to India and surrendered to an authorised dealer is converted into rupees at market rates.

The proceeds of Imports into India and exports from India have to be credited to or paid from the US Dollar Escrow account maintained with the bank in India.