In this article, Pallav Gupta, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the process for lending money to Indian citizens by a foreign national.

For the purpose of promoting external finance and foreign trade, Foreign Exchange Management Act, 1999 and Foreign Exchange Regulations, 2000 were brought to control the negative effect of the liberalisation. It extended up to defining the limits of the foreign exchange and explaining the diverse role of the apex bank of India in it. It also brought the concept of lending by non-resident Indians or Foreigners to Indian citizens.

Introduction

The international financial markets are a very lucrative source of debt finance, especially for businesses in India, on account of the low-interest rates prevalent globally when compared to the Indian financial markets. Financial markets outside are considered to be as the most lucrative option of borrowing/financing due to the cheaper interest rates as compared to the Indian financial markets.

Reserve Bank of India (“RBI”) has been a little conservative with the help of the tools of law that is Foreign Exchange Management Act, 2000(“FEMA”) and Foreign Exchange Regulations, 2000. Lately, with respect to the aspect of overseas borrowing, be it commercial or private, policies of the RBI has been under long debates. The laws have made external borrowing to be completely legal but there have been so much of compliances and requirements to be met in order to suffice those transactions. With comparison to Foreign Lending and Borrowing, relatively lesser conditions are imposed by the RBI in Foreign Investment which still creates a fear inside the mind of the general public when they think of private lending through a foreigner or a non-resident Indian.

As discussed above RBI has allowed the channel of borrowing and lending between Indian and foreign individuals but has put up certain requisites and processes so that the Indian financial structure is not affected by any means.

Definitions

Just like every piece of enactment or law, it is certainly important to understand the definitions of certain general terms as explained in the laws enacted in India.

‘Person’

To start with, as per the FEMA, 2000, a person can be an individual, a firm, a company or a Hindu Undivided Family, a body of individuals or associations of persons, any branch, office or agency which is owned by such person and every artificial juridical person. It is now very important to understand as to what FEMA defines a person who is a resident of India. A person will be considered as residing in India if during the course of preceding financial year that person has been residing in India for more than one hundred and eighty two days but will not include a person who has gone out of India for the purpose of his employment, carrying his business outside of Indian neither when a person who comes to stay in India for the purpose of his employment or carrying his business.

It shall be considered as a person if that body, agency or branch which is in India but is controlled by someone who is not a resident of India or even when that branch, agency or body has been based out of India but is controlled by a person resident in India. A person who is not a resident of India has been clearly defined under FEMA in simple words as a person who is not a resident of India. Another important term is the authorised person which includes any offshore banking unit or an authorised dealer or a money changer authorised under Section 10 of FEMA who can deal in foreign exchange and foreign securities.

Foreign Borrowing

Various provisions from FEMA and other Regulations and Notifications cover various kinds of transactions such as borrowing, investing, lending which would require the watch of the RBI. Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 (“FEMBLRR”) contains certain provisions regarding the borrowing by an Indian person or a company from a foreign source in the Indian currency. Whereas the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000 (“FEMBLFER”) contains provisions regarding borrowing by an Indian person or a Company in foreign exchange.

As far as FEMBLFER is concerned, it gives permission generally to the Authorised Dealers and its branches and also others to lend and borrow in foreign exchange.  An Authorised Dealer is given permission to borrow in foreign currency subject to certain conditions such as:-

• It can be borrowed from any of its branch or correspondent or head office which is situated outside India up to the limit of 100% of its unimpaired Tier I capital or USD 10 million, whichever is higher
• It can also be borrowed from Indian bank whose branch is situated outside India for the purpose of its normal course banking business outside India only.
• It can also be borrowed from a financial institution or any bank which is situated outside of India, for granting pre-shipment or post-shipment foreign currency credit to its exported constituent.

The RBI has introduced a Liberalised Remittance Scheme(LRS) wherein the ADs allow resident individuals to make remittance payments with a value of up to USD 250,000 per financial year. This applies for any permitted current or capital account transactions or a combination of the two.

As far as persons other than Authorised Persons are concerned, conditions are a little different as compared to that of Authorised Persons when borrowing from outside situated bank is concerned. It can be taken by an Indian resident from an outside situated bank, for the purpose of executing a civil construction contractor turnkey project or for exports on deferred payment basis outside India.

Lending By a Foreigner/ Non-Resident Indian to an Indian Person

A requirement of funds for private use can come at any point in time in a person’s life. Sometimes the need can be such that a person may not have that much time to arrange for the funds from the banks and financial institutions. Thereafter he turns to his relatives or friends’ asking for an arrangement of funds and it is not necessary that those relatives or friends would be living in India only. So now we will see under what conditions can a person borrow money from his friends living abroad.

FEMBLRR contains various conditions regarding borrowing by an Indian citizen from a non-resident Indian or an Indian living outside India which are:

• It has to be done on a non-repatriation basis which is a very first requisite.
• The borrow can receive the loan amount only by way of inward remittance from outside India or from an NRE, NRO, FCNR, NRNR, NRSR. NRE stands for Non-resident External Account which is a kind of account where an exchange of Indian currency and foreign currency is possible both within India and outside India. NRE is more or less the same type of bank account which can be maintained by NRIs. Similarly, FCNR (Foreign Currency Non-Resident) is a type of fixed deposit account wherein deposits can be made in major currencies like US Dollar, UK Pound, Canadian Dollar etc. It is pertinent to mention that these accounts which are maintained by the lender has to be with an authorised bank of India or with an Authorised Dealer.
• The period of loan for which it is provided to the lender cannot exceed the period of three years.
• The rate of interest charged at that shall not be exceeded by two percentage points over the rate by a bank at the time of availing of a loan.

There is another way of borrowing from foreign residents which can be done on a repatriable basis. The permission is to borrow up to US$ 250,000 or its equivalent in foreign exchange on a repatriable basis by an individual Resident from his close relatives (as defined in Section 6 of the Companies Act) resident outside India subject to –

• The loan has to be interest-free
• The minimum maturity period of the loan has to be 1 year.
• The amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR account of the non-resident lender.

Conclusion

The RBI has adopted an approach which is considered very backward towards debt investment as compared to other countries. The regulations, however, go through time to time of amendments on the basis of the needs of the economy. But there is still a bigger need to get these reforms to get under necessary changes. However, violations of regulations pertaining to borrowing and lending are still viewed stringently by RBI, inviting serious action. This makes it necessary to remain abreast of all the changes in this arena.