Article

RBI replaces
Master Directions for Master Circulars

Team Vinod Kothari & Company

[email protected]

21st January, 2015

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 RBI replaces Master Directions for Master Circulars

Contents
Issuance of the Master Directions ............................................................................................................... 3
1. Setting up of branch/liaison/project office ..................................................................................... 4
2. Acquisition and Transfer of Immovable Property under Foreign Exchange
Management Act, 1999 .................................................................................................................................... 4
3. Borrowing and Lending transactions in Indian Rupee between Persons Resident in
India and Non-Resident Indians/ Persons of Indian Origin .............................................................. 5
4. Money changing Activity ......................................................................................................................... 6
5. External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign
Currency by Authorized Dealers and Persons other than Authorized Dealers ......................... 6
6. Imports of goods & services .................................................................................................................. 7
7. Export of goods and services ................................................................................................................. 9
8. Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary
(WOS) Abroad................................................................................................................................................... 11
9. Compounding of Contraventions ...................................................................................................... 17
There has been no changes in the following subject matter ...................................................... 18
 RBI replaces Master Directions for Master Circulars

Issuance of the Master Directions

It may be recalled that Governor Dr. Raghuram G. Rajan had, in the Fourth Bi-monthly Monetary
Policy Statement, 2015-16 announced on September 29, 2015 (Para 29) that

“The Reserve Bank will update all its master regulations, and streamline the required
procedure for compliance with the regulations by January 1, 2016. All master regulations
will be fully updated and placed online. The Reserve Bank will also work to improve clarity
in regulatory communications.”

In the wake of above statement and with the view to simplify complexities, the Reserve Bank of
India on 4th January issued 17 Master Directions covering foreign exchange transactions. Master
Directions have been issued with the aim to consolidate instructions on all rules and regulations
issued by Reserve Bank of India under various Acts including banking issues and foreign
exchange.

Before delving into the comparisons between the Master Directions and the Master Circulars, we
need to understand what a Master Direction actually is. Master Direction, is the compilation of
relevant A.P (DIR Series) Circulars issued so far within the ambit of the relevant regulations,
amended up to date and cover different classes of transactions permitted under the rules and
regulations framed under the Foreign Exchange Management Act, 1999 (FEMA). It supersedes
the Master Circular. Also, explanations of rules and regulations will be issued by way of
Frequently Asked Questions (FAQs) after issue of the Master Directions wherever necessary.

The process of issuing Master Directions involves issuing one Master Direction for each subject
matter covering all instructions on that subject. Any changes in the rules, regulation or policy are
intended to be communicated during the year by way of circulars. These changes will get
reflected in the Master Directions available on the RBI website along with the dates on which
changes are made

Master Directions on foreign exchange matters primarily deal with the manner in which an
authorized person should conduct cross border/forex transactions. The forex transactions are
conjointly regulated by RBI and GOI. The Reserve Bank frames regulations in respect of capital
account and trade transactions in terms of Sections 6, 7, 8, 9, 10 and 47 of FEMA whereas the
Government of India frames rules in respect of current account transactions and compounding
proceedings. Further, as per section 3 of FEMA, all cross border and/or foreign exchange
transactions are to be conducted through a person authorized to do so under section 10 of FEMA.
Therefore, Reserve Bank of India issues directions [through A.P. (DIR Series) Circulars] to the
Authorized Persons under section 11 of FEMA in regard to the manner of conducting these
transactions with their customers/ constituents. However with so many circulars in place, there
was a major problem of communication, as for every change, the particular circular needed to be
revised. Therefore, in a bid to simplify communication, the RBI has issued Master Directions
which consolidates instructions in all the previous issued A.P. (DIR Series) Circulars in one place.

In an attempt to point out the relevant changes introduced by RBI, we have tabularized all the
relevant and prominent changes taking into account 15 Master Directions. The following table
accounts for the differences between the Master Direction and Master Circulars
 RBI replaces Master Directions for Master Circulars

Basis Master Directions Master Circulars Remarks

1. Setting up of branch/liaison/project office

Reporting requirement All new entities setting All new entities The master
up LO/BO/PO in India setting up Project directions are
shall submit a report Offices shall submit a wider in scope as
containing report containing it encompasses
information, as per information, as 13 per LO/BO/PO but
format provided in format provided in the master
Annex-4 within five Annex 3 within five circular considers
working days of the working days of the only project
LO/BO/PO becoming PO becoming office for
functional to the functional to the reporting
Director General of Director General of requirement.
Police (DGP) of the Police (DGP) of the
state concerned in state concerned in
which LO/BO/PO has which PO has
established its office; established its office;
if there is more than if there is more than
one office of such a one office of such a
foreign entity, in such foreign entity, in such
cases to each of the cases to each of the
DGP concerned of the DGP concerned of the
state where it has state where it has
established office in established office in
India. India

2. Acquisition and Transfer of Immovable Property under Foreign Exchange

Management Act, 1999

Acquisition of Acquisition of New provision Restrictive clause:

immovable property by immovable property in branch, office or
person resident India by a branch, any other place or
outside India for office or other place of office of any
carrying on a business, of entities of entity of the said
permitted activity Pakistan or places cannot
Bangladesh or Sri acquire any
Lanka or Afghanistan immovable
 RBI replaces Master Directions for Master Circulars

or China or Iran or property without

Hong Kong or Macau prior approval of
or Nepal or Bhutan RBI
origin/ nationality/
ownership requires the
prior approval of the
Reserve Bank.
Repatriation of sale In case an immovable New provision -
proceeds of property in India has
immovable property been purchased by an
NRI/ PIO out of
housing loans availed
in terms of Foreign
Exchange
Management
(Borrowing and
lending in rupees)
Regulations, 2000, as
amended from time to
time, and the
repayments for such
loans are made out of
remittances received
from abroad through
banking channels or
by debit to the NRE/
FCNR(B) account of
the NRI, such
repayments may be
treated as equivalent to
foreign exchange
received.

3. Borrowing and Lending transactions in Indian Rupee between Persons

Resident in India and Non-Resident Indians/ Persons of Indian Origin

Borrowing in INR by Payment of interest where the loan is Option to pay any
persons other than and repayment of made out of funds interest and
companies in India principal shall be held in Non-resident principal out of
made only to the NRO Special Rupee NRSR has been
account of the lender (NRSR) account of removed. Now
the lender, payment of payment of
interest and repayment interest and
of loan shall be made repayment of loan
by credit to that can be only done
account; and in other through NRO
cases, payment of account of the
interest and repayment lender
 RBI replaces Master Directions for Master Circulars

of loan shall be made

by credit to the
lender's Non-resident
Ordinary (NRO) or
Non-resident Special
Rupee (NRSR)
account as desired by
the lender;

4. Money changing Activity

Pre-paid forex card In this regard, it is Authorised Dealers Clarification has

clarified that prepaid Category-II may issue hence forth been
foreign currency cards forex pre-paid cards to provided
are a form of foreign residents travelling on
currency, similar to private/business visit
foreign currency notes abroad, subject to
or travellers cheque. KYC/AML/CFT
As such, the requirements. However,
authorised the settlement in respect
dealers/FFMCs selling of forex pre-paid cards
pre-paid foreign may be effected through
currency cards for AD Category-I banks.
travel purposes are
required to comply
with the same rigorous
standards of due
diligence and KYC as
they would in case
they were selling
foreign currency
notes/ travellers
cheque to their
customers.

5. External Commercial Borrowings, Trade Credit, Borrowing and Lending

in Foreign Currency by Authorized Dealers and Persons other than
Authorized Dealers

Hedging The entities raising ECB The entities raising In order to make
Requirements under the provisions of ECB under the the language
tracks I and II are provisions of tracks I clear and specific
required to follow the and II are required to the entities need
guidelines for hedging follow the guidelines to follow
issued, if any, by the issued, if any, by the guidelines
 RBI replaces Master Directions for Master Circulars

concerned sectoral or concerned sectoral or regarding foreign

prudential regulator in prudential regulator. currency
respect of foreign exposure.
currency exposure
Form of ECB Loan including Bank Bank loan The scope has
loan been widened in
the Directions.
Participation of Under the USD 10 billion Participation of -
overseas branches scheme, ECB cannot be overseas branches /
/ subsidiaries of raised from overseas subsidiaries of Indian
Indian banks branches / subsidiaries of banks under Track I is
Indian branches. subject to the prudential
norms issued by the
DBR, RBI.
Additional While permitting New provision -
Requirements: changes under the
delegated powers, the AD
Category I banks should
ensure that Changes in
the end-use of ECBs
raised under the approval
route will continue to be
referred to the Foreign
Exchange Department,
Central Office, Reserve
Bank of India, Mumbai
Raising of loans as Imports should be as No reference Further
Trade Credit permissible under the clarification
extant Foreign Trade regarding
Policy of the Director authority
General of Foreign Trade regulating the
(DGFT) imports.

6. Imports of goods & services

Time Limit for Deferred payment Deferred payment There has been a
Deferred Payment arrangements (including arrangements, change in time
Arrangements suppliers’ and buyers’ including suppliers period for
credit) upto five years, and buyers credit, considering
are treated as trade providing for deferred payment
credits payments beyond a arrangement to
period of six months be considered as
from date of shipment trade credits.
up to a period of less
than three years, are
treated as trade credits
Issue of An authorised dealer may New provision RBI has issued
Guarantees by an give a guarantee or Letter notification
 RBI replaces Master Directions for Master Circulars

Authorised Dealer of Undertaking of Letter regarding

of Comfort in respect of issuance of
any debt, obligation or guarantee by an
other liability incurred by AD, which was
a person resident in India not there
and owned to a person previously.
resident outside India, as
an importer, in respect of
import on deferred
payment terms in
accordance with the
approval by the Reserve
Bank of India for import
on such terms.
No guarantee for an
amount exceeding USD
500,000 shall be issued
on behalf of a service
importer other than a
Public Sector Company
where the service
importer is a Public
Sector Company or a
Department /
Undertaking of the
Government of India /
State Government, no
guarantee for an amount
exceeding USD 100,000
shall be issued without
the prior approval of the
Ministry of Finance,
Government of India
AD Category – I AD bank should ensure AD bank should Annex 3 has
bank may handle one-to-one matching in ensure one-to-one been removed by
bonafide case of each Merchanting matching in case of RBI.
Merchanting Trade Trade transaction and each Merchanting
Transactions and report defaults in any leg Trade transaction and
ensure that: by the traders to the report defaults in any
concerned Regional leg by the traders to
Office of RBI, on half the concerned
yearly basis within 15 Regional Office of
days from the close of RBI, on half yearly
each half year, i.e. June basis in the format as
and December. given in Annex 3,
within 15 days from
the close of each half
year, i.e. June and
 RBI replaces Master Directions for Master Circulars

December.

7. Export of goods and services

Issue of Guarantees An authorized dealer No Reference Issue of

by an Authorised may give guarantee in guarantee by
Dealer respect of any debt, Authorized
obligation or other Dealer has been
liability incurred by a added as a topic.
person resident in
India and owned to a
person resident outside
India, where the debt,
obligation or other
liability is incurred by
the person resident in
India as an exporter,
on account of exports
from India.

An authorized dealer
may give a guarantee
in respect of any debt,
obligation or other
liability incurred by a
person resident outside
India, in the following
cases, namely:

(i) where such debt,

obligation or liability
is owned to a person
resident in India in
connection with a
bonafide trade
transaction:

Provided that the

guarantee given under
this clause is covered
by a counter-guarantee
of a bank of
international repute
resident broad;

(ii) as a counter-
 RBI replaces Master Directions for Master Circulars

guarantee to cover
guarantee issued by
his branch or
correspondent outside
India, on behalf of
Indian exporter in
cases where
guarantees of only
resident banks are
acceptable to overseas
buyers
Manner of Receipt AD Category-I banks OPGSPs who are Removal of one
and Payment desirous of entering already providing such time approval
into such an services as per the from the RBI for
arrangement/s should specific holding-on entering into
report the details of approvals issued by the arrangements.
each such arrangement Reserve Bank shall
as and when entered open a liaison office in
into to the Foreign India within three
Exchange Department, months from
Central Office, November 16, 2010,
Reserve Bank of India, after duly finalizing
Mumbai. their arrangement with
the AD-Category-I
banks and obtaining
approval from the
Reserve Bank for this
purpose. In respect of
all new arrangements,
the OPGSP shall open
a liaison office with
the approval of the
Reserve Bank before
operationalising the
arrangement. AD
Category-I banks
desirous of entering
into such an
arrangement/s should
approach the Reserve
Bank for obtaining one
time permission in this
regard and thereafter
report the details of
each such arrangement
as and when entered
into.
 RBI replaces Master Directions for Master Circulars

8. Direct Investment by Residents in Joint Venture (JV) / Wholly Owned

Subsidiary (WOS) Abroad

Obligations of Indian (4) An annual return on Obligation w.r.t

Party Foreign Liabilities and - to filing of FLA
Assets (FLA) is has been now
required to be provided
submitted directly by specifically in
all the Indian the said
companies which have Direction though
received FDI and/or it was provide in
made FDI abroad (i.e. the Regulations.
overseas investment) in
the previous year(s)
including the current
year, to the Director,
External Liabilities and
Assets Statistics
Division, Department
of Statistics and
Information
Management (DSIM),
Reserve Bank of India.
The Annual Return on
FLA is available on the
RBI website
(www.rbi.org.in →
Forms category →
FEMA Forms) which
can be duly filled-in,
validated and sent bye-
mail, by July 15 every
year.

C.5 Issue of Indian Eligible companies No such provision -

Depository Receipts resident outside India here.
(IDRs) may issue Indian
Depository Receipts
(IDRs) through a
Domestic Depository.
The permission has
been granted subject to
compliance with the
Companies (Issue of
Depository Receipts)
Rules, 2004 and
subsequent
 RBI replaces Master Directions for Master Circulars

amendments made
thereto and the SEBI
(DIP) Guidelines, 2000,
as amended from time
to time. In case of
raising of funds
through issuance of
IDRs by
financial/banking
companies having
presence in India, either
through a branch or
subsidiary, the approval
of the sectoral
regulator(s) should be
obtained before the
issuance of IDRs.

Opening of Foreign In terms of the Wherever, the host A more detailed

Currency Account conditions stipulated country Regulations view has been
abroad by an Indian under A.P. (DIR stipulate that the provided in the
Party Series) Circular No. investments (or Master Direction
101 dated April 02, financial commitment)
2012, eligible Indian into the country are
Party may open, hold required to be routed
and maintain Foreign through a designated
Currency Account account, an Indian
(FCA) abroad for the party is allowed to
purpose of overseas open, hold and
direct investments maintain Foreign
subject to the following Currency Account
terms and conditions: (FCA) abroad for the
purpose of overseas
I. I. The host country direct investments (or
regulations stipulate financial commitment)
that the investments subject to certain terms
into the country are and conditions
required to be routed stipulated under A.P.
through a designated (DIR Series) Circular
account. No. 101 dated April
II. II. FCA shall be 02, 2012.
opened, held and
maintained as per the
regulation of the host
country.
III. III. The remittances
sent to the FCA by the
Indian party should be
 RBI replaces Master Directions for Master Circulars

utilized only for

making overseas direct
investment into the JV /
WOS abroad.
IV. IV. Any amount
received in the account
by way of dividend and
/ or other entitlements
from the subsidiary
shall be repatriated to
India within 30 days
from the date of credit.
V. V. The Indian Party
should submit the
details of debits and
credits in the FCA on
yearly basis to the
designated AD bank
with a certificate from
the Statutory Auditors
of the Indian party
certifying that the FCA
was maintained as per
the host country laws
and the extant FEMA
regulations / provisions
as applicable.
VI. The FCA so opened
shall be closed
immediately or within
30 days from the date
of disinvestment from
JV / WOS or cessation
thereof

Conditions for Indian In terms of Regulation No provision here It’s a new

entities to offer any 5 (b) of Notification condition added
form of Guarantee- No. FEMA 8/2000-RB in the Directions.
corporate or dated May 3, 2000, an
personal/primary or authorised dealer in
collateral / guarantee India may also give a
by the promoter Bank guarantee/ issue
company / guarantee SBLC to a joint venture
by group company, company or a wholly-
sister concern or owned subsidiary of a
associate company in company in India in
India. connection with its
[Para B.1 4(a)(iv)] business abroad
 RBI replaces Master Directions for Master Circulars

provided that the terms

and conditions
stipulated in Foreign
Exchange Management
(Transfer and Issue of
Foreign Security)
Regulations, 2000 for
promoting or setting up
such company or
subsidiary are
continued to be
complied with;
General permission d. Purchase of shares of d. Purchase of shares In order to
in certain cases a JV / WOS abroad of of a JV / WOS abroad provide more
the Indian promoter of the Indian promoter flexibility to
company by the company by the RBI, the limit
employees/directors of employees/directors of has been
Indian promoter Indian promoter removed and
company which is company which is RBI shall reserve
engaged in the field of engaged in the field of the power of
software where the software where the changing the
consideration for consideration for limit time to
purchase does not purchase does not time.
exceed the ceiling as exceed USD 10,000 or
stipulated by Reserve its equivalent per
Bank from time to employee in a block
time. of five calendar years.
e. AD Category – I
e. AD Category – I banks may make The fixed limit
banks may make remittances up to USD for remittances
remittances for 50,000 or its has been
purchase of foreign equivalent in a block removed, instead
securities in the of five calendar years, the ceiling
knowledge based sector without the prior
under the ADR / GDR approval of the
linked ESOPs, up to Reserve Bank, for
the ceiling as purchase of foreign
stipulated by the securities in the
Reserve Bank from knowledge based
time to time after sector under the ADR /
satisfying that the GDR linked ESOPs,
issuing company has after satisfying that the
followed the relevant issuing company has
guidelines of SEBI / followed the relevant
Government. guidelines of SEBI /
Government

Investments (or Trading in Trading in Regulatory

 RBI replaces Master Directions for Master Circulars

financial Commodities Commodities authority has

commitment) in Exchanges overseas Exchanges overseas been changed
Financial Services and setting up JV/WOS and setting up from FMC to
Sector for trading in overseas JV/WOS for trading in SEBI
exchanges will be overseas exchanges
reckoned as financial will be reckoned as
services activity and financial services
require clearance from activity and require
SEBI. clearance from the
Forward Markets
Commission.
Investment in equity Investments made by No such provision The requirement
of companies listed Indian companies for reporting of
registered overseas / and Mutual Funds in investment made
rated debt accordance with para by Mutual funds
instruments (1) and (2) above, are and Indian listed
to be reported online on entities, to be
[Para B.7] a monthly basis by the made by the AD
AD banks in the format bank, has been
as prescribed by the provided for in
Reserve Bank from the Directions.
time to time
Maintenance of SEBI approved clearing No reference
collateral by FIIs for corporations of stock
transactions in exchanges and their
derivative segment- clearing members may
opening of demat undertake the following
accounts by Clearing transactions subject to
Corporations and the guidelines issued
Clearing Members from time to time by
SEBI in this regard :

i. to open and maintain

demat accounts with
foreign depositories
and to acquire, hold,
pledge and transfer the
foreign sovereign
securities, offered as
collateral by FIIs;
ii. to remit the proceeds
arising from corporate
action, if any, on such
foreign sovereign
securities; and
iii. to liquidate such
foreign sovereign
securities if the need
 RBI replaces Master Directions for Master Circulars

arises.

Clearing Corporations
shall report, on a
monthly basis, the
balances of foreign
sovereign securities,
held by them as non-
cash collaterals of their
clearing members to
the Chief General
Manager, Reserve
Bank of India, Foreign
Exchange Department,
Foreign Investment
Division, Central
Office, Mumbai. The
report should be
submitted by the 10th
of the following month
to which it relates.

General procedural In case of In case of Scope of

instructions disinvestment by way disinvestment / closure submission of
of closure / winding up / winding up / report has been
/ voluntary liquidation / voluntary liquidation increased
merger/ under the Automatic
amalgamation of JV/ Route a report should
WOS under the continue to be
Automatic Route submitted by the
a report should designated AD
continue to be Category - I bank, in
submitted by the Part IV of form OD
designated AD
Category - I bank, in
Part IV of form OD
Operational AD Category – I banks AD Category – I banks A ceiling has
Instructions to may make remittances may make remittances been prescribed
Authorised Dealer for purchase of foreign up to USD 50,000 or now.
Banks securities in the its equivalent in a
knowledge based sector block of five calendar
under the ADR / GDR years, without the
linked ESOPs, up to prior approval of the
the ceiling as Reserve Bank, for
stipulated by the purchase of foreign
Reserve Bank from securities in the
time to time. knowledge based
 RBI replaces Master Directions for Master Circulars

sector under the ADR /

GDR linked ESOPs

9. Compounding of Contraventions

Application for The applicants are also No such provision New provision
Compounding advised to bring to the here. has been added
notice of the requiring notice
compounding authority to be given to
change, if any, in the CA for any
address/ contact details change in
of the applicant during address/contact
the pendency of the details of the
compounding applicant.
application with
Reserve Bank.
Scope and Manner of In case where No such provision New provision
Compounding(factors adjudication has been here. has been added
to be taken into done by the Directorate stating about the
consideration for the of Enforcement no manner of
purpose of passing the contravention can be compounding for
Compounding Order compounded in terms adjudication
and for arriving at the of Rule 11 of Foreign done by
quantum of sum on Exchange Directorate of
payment of which (Compounding Enforcement.
contravention shall be Proceedings) Rules,
compounded) 2000.
Scope and Manner of No such provision here. The application for Provision for
Compounding compounding will be disposal of
disposed of on merits, application upon
upon consideration of merits by CA has
the records and been removed.
submissions and at the
absolute discretion of
the CA.
Pre-requisites for No such provision here. The Reserve Bank Provision of RBI
compounding process generally advises the specifying
persons concerned of persons of their
their choice and option choice for
to make an application making an
for compounding as application for
and when such compounding has
contraventions come to been removed.
its notice. The facts
constituting such
contraventions will be
brought to the notice of
the Directorate of
 RBI replaces Master Directions for Master Circulars

Enforcement in case no
application for
compounding is made
within the time
indicated by the
Reserve Bank.
Contents of the order No such provision here. Every such order shall Removal of
of the Compounding be dated and signed by provision of
Authority the Compounding dating and
Authority under his signing of orders
seal. by the CA.
(Any further changes will be updated in this article as and when required)

There has been no changes in the following subject matter

 Liberalised Remittance Scheme (LRS) (Corrected)

 Other Remittance Facilities
 Reporting under Foreign Exchange Management Act, 1999
 Miscellaneous
 Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident
Exchange Houses
 Insurance

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