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RBI replaces
Master Directions for Master Circulars
Team Vinod Kothari & Company
21st January, 2015
Article
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Disclaimer:
This document is intended to initiate academic debate on a pertinent question. It is not intended to be
a professional advice and should not be relied upon for real life facts.
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
up LO/BO/PO in India
shall submit a report
containing
information, as per
format provided in
Annex-4 within five
working days of the
LO/BO/PO becoming
functional to the
Director General of
Police (DGP) of the
state concerned in
which LO/BO/PO has
established its office;
if there is more than
one office of such a
foreign entity, in such
cases to each of the
DGP concerned of the
state where it has
established office in
India.
All new entities
setting up Project
Offices shall submit a
report containing
information, as 13 per
format provided in
Annex 3 within five
working days of the
PO becoming
functional to the
Director General of
Police (DGP) of the
state concerned in
which PO has
established its office;
if there is more than
one office of such a
foreign entity, in such
cases to each of the
DGP concerned of the
state where it has
established office in
India
The master
directions are
wider in scope as
it encompasses
LO/BO/PO but
the master
circular considers
only project
office for
reporting
requirement.
2. Acquisition and Transfer of Immovable Property under Foreign Exchange
Management Act, 1999
Acquisition of
immovable property by
person resident
outside India for
carrying on a
permitted activity
Acquisition of
immovable property in
India by a branch,
office or other place of
business, of entities of
Pakistan or
Bangladesh or Sri
Lanka or Afghanistan
New provision Restrictive clause:
branch, office or
any other place or
office of any
entity of the said
places cannot
acquire any
immovable
RBI replaces Master Directions for Master Circulars
or China or Iran or
Hong Kong or Macau
or Nepal or Bhutan
origin/ nationality/
ownership requires the
prior approval of the
Reserve Bank.
property without
prior approval of
RBI
Repatriation of sale
proceeds of
immovable property
In case an immovable
property in India has
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.
New provision -
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
persons other than
companies in India
Payment of interest
and repayment of
principal shall be
made only to the NRO
account of the lender
where the loan is
made out of funds
held in Non-resident
Special Rupee
(NRSR) account of
the lender, payment of
interest and repayment
of loan shall be made
by credit to that
account; and in other
cases, payment of
interest and repayment
Option to pay any
interest and
principal out of
NRSR has been
removed. Now
payment of
interest and
repayment of loan
can be only done
through NRO
account of the
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
clarified that prepaid
foreign currency cards
are a form of foreign
currency, similar to
foreign currency notes
or travellers cheque.
As such, the
authorised
dealers/FFMCs selling
pre-paid foreign
currency cards for
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.
Authorised Dealers
Category-II may issue
forex pre-paid cards to
residents travelling on
private/business visit
abroad, subject to
KYC/AML/CFT
requirements. However,
the settlement in respect
of forex pre-paid cards
may be effected through
AD Category-I banks.
Clarification has
hence forth been
provided
5. External Commercial Borrowings, Trade Credit, Borrowing and Lending
in Foreign Currency by Authorized Dealers and Persons other than
Authorized Dealers
Hedging
Requirements
The entities raising ECB
under the provisions of
tracks I and II are
required to follow the
guidelines for hedging
issued, if any, by the
The entities raising
ECB under the
provisions of tracks I
and II are required to
follow the guidelines
issued, if any, by the
In order to make
the language
clear and specific
the entities need
to follow
guidelines
RBI replaces Master Directions for Master Circulars
concerned sectoral or
prudential regulator in
respect of foreign
currency exposure
concerned sectoral or
prudential regulator.
regarding foreign
currency
exposure.
Form of ECB Loan including Bank
loan
Bank loan The scope has
been widened in
the Directions.
Participation of
overseas branches
/ subsidiaries of
Indian banks
Under the USD 10 billion
scheme, ECB cannot be
raised from overseas
branches / subsidiaries of
Indian branches.
Participation of
overseas branches /
subsidiaries of Indian
banks under Track I is
subject to the prudential
norms issued by the
DBR, RBI.
-
Additional
Requirements:
While permitting
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
New provision -
Raising of loans as
Trade Credit
Imports should be as
permissible under the
extant Foreign Trade
Policy of the Director
General of Foreign Trade
(DGFT)
No reference Further
clarification
regarding
authority
regulating the
imports.
6. Imports of goods & services
Time Limit for
Deferred Payment
Arrangements
Deferred payment
arrangements (including
suppliers’ and buyers’
credit) upto five years,
are treated as trade
credits
Deferred payment
arrangements,
including suppliers
and buyers credit,
providing for
payments beyond a
period of six months
from date of shipment
up to a period of less
than three years, are
treated as trade credits
There has been a
change in time
period for
considering
deferred payment
arrangement to
be considered as
trade credits.
Issue of
Guarantees by an
An authorised dealer may
give a guarantee or Letter
New provision RBI has issued
notification
RBI replaces Master Directions for Master Circulars
Authorised Dealer of Undertaking of Letter
of Comfort in respect of
any debt, obligation or
other liability incurred by
a person resident in India
and owned to a person
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
regarding
issuance of
guarantee by an
AD, which was
not there
previously.
AD Category – I
bank may handle
bonafide
Merchanting Trade
Transactions and
ensure that:
AD bank should ensure
one-to-one matching in
case of each Merchanting
Trade transaction and
report defaults in any leg
by the traders to the
concerned Regional
Office of RBI, on half
yearly basis within 15
days from the close of
each half year, i.e. June
and December.
AD bank should
ensure one-to-one
matching in case of
each Merchanting
Trade transaction and
report defaults in any
leg by the traders to
the concerned
Regional Office of
RBI, on half yearly
basis in the format as
given in Annex 3,
within 15 days from
the close of each half
year, i.e. June and
Annex 3 has
been removed by
RBI.
RBI replaces Master Directions for Master Circulars
December.
7. Export of goods and services
Issue of Guarantees
by an Authorised
Dealer
An authorized dealer
may give guarantee in
respect of any debt,
obligation or other
liability incurred by a
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-
No Reference Issue of
guarantee by
Authorized
Dealer has been
added as a topic.
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
and Payment
AD Category-I banks
desirous of entering
into such an
arrangement/s should
report the details of
each such arrangement
as and when entered
into to the Foreign
Exchange Department,
Central Office,
Reserve Bank of India,
Mumbai.
OPGSPs who are
already providing such
services as per the
specific holding-on
approvals issued by the
Reserve Bank shall
open a liaison office in
India within three
months from
November 16, 2010,
after duly finalizing
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.
Removal of one
time approval
from the RBI for
entering into
arrangements.
RBI replaces Master Directions for Master Circulars
8. Direct Investment by Residents in Joint Venture (JV) / Wholly Owned
Subsidiary (WOS) Abroad
Obligations of Indian
Party
(4) An annual return on
Foreign Liabilities and
Assets (FLA) is
required to be
submitted directly by
all the Indian
companies which have
received FDI and/or
made FDI abroad (i.e.
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.
-
Obligation w.r.t
to filing of FLA
has been now
provided
specifically in
the said
Direction though
it was provide in
the Regulations.
C.5 Issue of Indian
Depository Receipts
(IDRs)
Eligible companies
resident outside India
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
No such provision
here.
-
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
Currency Account
abroad by an Indian
Party
In terms of the
conditions stipulated
under A.P. (DIR
Series) Circular No.
101 dated April 02,
2012, eligible Indian
Party may open, hold
and maintain Foreign
Currency Account
(FCA) abroad for the
purpose of overseas
direct investments
subject to the following
terms and conditions:
I. I. The host country
regulations stipulate
that the investments
into the country are
required to be routed
through a designated
account.
II. II. FCA shall be
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
Wherever, the host
country Regulations
stipulate that the
investments (or
financial commitment)
into the country are
required to be routed
through a designated
account, an Indian
party is allowed to
open, hold and
maintain Foreign
Currency Account
(FCA) abroad for the
purpose of overseas
direct investments (or
financial commitment)
subject to certain terms
and conditions
stipulated under A.P.
(DIR Series) Circular
No. 101 dated April
02, 2012.
A more detailed
view has been
provided in the
Master Direction
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
entities to offer any
form of Guarantee-
corporate or
personal/primary or
collateral / guarantee
by the promoter
company / guarantee
by group company,
sister concern or
associate company in
India.
[Para B.1 4(a)(iv)]
In terms of Regulation
5 (b) of Notification
No. FEMA 8/2000-RB
dated May 3, 2000, an
authorised dealer in
India may also give a
Bank guarantee/ issue
SBLC to a joint venture
company or a wholly-
owned subsidiary of a
company in India in
connection with its
business abroad
No provision here It’s a new
condition added
in the Directions.
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
in certain cases
d. Purchase of shares of
a JV / WOS abroad of
the Indian promoter
company by the
employees/directors of
Indian promoter
company which is
engaged in the field of
software where the
consideration for
purchase does not
exceed the ceiling as
stipulated by Reserve
Bank from time to
time.
e. AD Category – I
banks may make
remittances for
purchase of foreign
securities in the
knowledge based sector
under the ADR / GDR
linked ESOPs, up to
the ceiling as
stipulated by the
Reserve Bank from
time to time after
satisfying that the
issuing company has
followed the relevant
guidelines of SEBI /
Government.
d. Purchase of shares
of a JV / WOS abroad
of the Indian promoter
company by the
employees/directors of
Indian promoter
company which is
engaged in the field of
software where the
consideration for
purchase does not
exceed USD 10,000 or
its equivalent per
employee in a block
of five calendar years. e. AD Category – I
banks may make
remittances up to USD
50,000 or its
equivalent in a block
of five calendar years,
without the prior
approval of the
Reserve Bank, for
purchase of foreign
securities in the
knowledge based
sector under the ADR /
GDR linked ESOPs,
after satisfying that the
issuing company has
followed the relevant
guidelines of SEBI /
Government
In order to
provide more
flexibility to
RBI, the limit
has been
removed and
RBI shall reserve
the power of
changing the
limit time to
time.
The fixed limit
for remittances
has been
removed, instead
the ceiling
Investments (or Trading in Trading in Regulatory
RBI replaces Master Directions for Master Circulars
financial
commitment) in
Financial Services
Sector
Commodities
Exchanges overseas
and setting up JV/WOS
for trading in overseas
exchanges will be
reckoned as financial
services activity and
require clearance from
SEBI.
Commodities
Exchanges overseas
and setting up
JV/WOS for trading in
overseas exchanges
will be reckoned as
financial services
activity and require
clearance from the
Forward Markets
Commission.
authority has
been changed
from FMC to
SEBI
Investment in equity
of companies
registered overseas /
rated debt
instruments
[Para B.7]
Investments made by
listed Indian companies
and Mutual Funds in
accordance with para
(1) and (2) above, are
to be reported online on
a monthly basis by the
AD banks in the format
as prescribed by the
Reserve Bank from
time to time
No such provision The requirement
for reporting of
investment made
by Mutual funds
and Indian listed
entities, to be
made by the AD
bank, has been
provided for in
the Directions.
Maintenance of
collateral by FIIs for
transactions in
derivative segment-
opening of demat
accounts by Clearing
Corporations and
Clearing Members
SEBI approved clearing
corporations of stock
exchanges and their
clearing members may
undertake the following
transactions subject to
the guidelines issued
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
No reference
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
instructions
In case of
disinvestment by way
of closure / winding up
/ voluntary liquidation /
merger/
amalgamation of JV/
WOS under the
Automatic Route
a report should
continue to be
submitted by the
designated AD
Category - I bank, in
Part IV of form OD
In case of
disinvestment / closure
/ winding up /
voluntary liquidation
under the Automatic
Route a report should
continue to be
submitted by the
designated AD
Category - I bank, in
Part IV of form OD
Scope of
submission of
report has been
increased
Operational
Instructions to
Authorised Dealer
Banks
AD Category – I banks
may make remittances
for purchase of foreign
securities in the
knowledge based sector
under the ADR / GDR
linked ESOPs, up to
the ceiling as
stipulated by the
Reserve Bank from
time to time.
AD Category – I banks
may make remittances
up to USD 50,000 or
its equivalent in a
block of five calendar
years, without the
prior approval of the
Reserve Bank, for
purchase of foreign
securities in the
knowledge based
A ceiling has
been prescribed
now.
RBI replaces Master Directions for Master Circulars
sector under the ADR /
GDR linked ESOPs
9. Compounding of Contraventions
Application for
Compounding
The applicants are also
advised to bring to the
notice of the
compounding authority
change, if any, in the
address/ contact details
of the applicant during
the pendency of the
compounding
application with
Reserve Bank.
No such provision
here.
New provision
has been added
requiring notice
to be given to
CA for any
change in
address/contact
details of the
applicant.
Scope and Manner of
Compounding(factors
to be taken into
consideration for the
purpose of passing the
Compounding Order
and for arriving at the
quantum of sum on
payment of which
contravention shall be
compounded)
In case where
adjudication has been
done by the Directorate
of Enforcement no
contravention can be
compounded in terms
of Rule 11 of Foreign
Exchange
(Compounding
Proceedings) Rules,
2000.
No such provision
here.
New provision
has been added
stating about the
manner of
compounding for
adjudication
done by
Directorate of
Enforcement.
Scope and Manner of
Compounding
No such provision here. The application for
compounding will be
disposed of on merits,
upon consideration of
the records and
submissions and at the
absolute discretion of
the CA.
Provision for
disposal of
application upon
merits by CA has
been removed.
Pre-requisites for
compounding process
No such provision here. The Reserve Bank
generally advises the
persons concerned of
their choice and option
to make an application
for compounding as
and when such
contraventions come to
its notice. The facts
constituting such
contraventions will be
brought to the notice of
the Directorate of
Provision of RBI
specifying
persons of their
choice for
making an
application for
compounding has
been removed.
RBI replaces Master Directions for Master Circulars
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
Enforcement in case no
application for
compounding is made
within the time
indicated by the
Reserve Bank.
Contents of the order
of the Compounding
Authority
No such provision here. Every such order shall
be dated and signed by
the Compounding
Authority under his
seal.
Removal of
provision of
dating and
signing of orders
by the CA.
(Any further changes will be updated in this article as and when required)
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