In this article, Shubham Kumar of Hidayatullah National Law University discusses rules and procedures to be followed by residents of India while borrowing from NRIs.
The lending and borrowing between residents of India and Non-Resident Indians are regulated by the Ministry of Finance and the Reserve Bank of India. Some notifications are issued from time to time by the RBI, regulating the lending and borrowing. The lending and borrowing is regulated by The Foreign Exchange Management Act, 1999 (see here), Master Direction on Borrowing and Lending transaction in Indian Rupee between Persons Resident in India and Non-Resident Indians issued by the Reserve Bank of India on January 1, 2016 (see here) and Foreign Exchange Management (Borrowing or lending in foreign exchange) Regulations, 2000 issued by the RBI on May 3, 2000 (see here). In this article, the recent notifications regulating the transactions will be dealt in detail.
Some important definitions you should know before reading this article
- An authorized person in this article will mean any person who is permitted by the RBI to deal in foreign exchange or foreign security or is an authorized money changer or an offshore banking unit.
- Capital Account transaction would mean any transaction which affects the assets or liabilities of residents of India.
- Current Account transaction would mean any transaction other than capital account transaction.
- Foreign currency will mean any currency other than Indian currency.
- Foreign Exchange will mean foreign currency, letters of credit and bills of exchange payable in foreign currency.
- A resident of India will mean a person residing in India for more than 182 days during the preceding financial year but will not include foreign citizens coming on employment or business visa to work in India.
- Non-Resident Indian (NRI) means a citizen of India residing outside and persons of Indian Origin.
- FCNR account means a Foreign Currency Non-Resident (Bank) account which can be opened with funds remitted from outside India by any NRI. Such account can be opened in any nationalized bank in India.
- Non-resident ordinary rupee account will mean an account by any person residing outside India who opens an account with any authorized bank involving transaction in rupees.
- Non-resident (non-repatriable) rupee deposit account will mean an account opened by any NRI out of funds remitted from outside India or by debiting their existing NRE/ FCNR account.
- The type of accounts which can be opened by NRIs, and the detailed explanation of the account defined above can be accessed at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=159&Mode=0.
- Close relatives have the same meaning as under the unamended Companies Act,1956. For the list of close relatives refer to https://www.corporate-cases.com/2012/01/relatives-under-the-companies-act.html
- Inward remittances are defined as a transfer of funds from a bank account in a foreign country to an account in India.
Can a resident of India borrow money from an NRI?
Yes, as per the Master Direction on Borrowing and Lending transaction in Indian Rupee between Persons Resident in India and Non-Resident Indians issued by the Reserve Bank of India on January 1, 2016 and the Foreign Exchange Management (Borrowing or lending in foreign exchange) Regulations, 2000 issued by the RBI on May 3, 2000 an Indian resident can borrow money from NRI but there are restrictions upon it. However, there is a difference between FDI and loan which can be understood by reading https://blog.ipleaders.in/every-indian-know-fdi/
For Indian Citizens
What are the conditions to be satisfied by residents of India for borrowing in Indian rupees from NRI’s?
Resident of India can only borrow money in Indian rupees from NRIs. The conditions under which he/she can borrow are:
- Borrowing shall be only on a non-repatriation basis. This means that funds once given cannot be taken back.
- The loan can be received only in two ways. The first way is to debit the NRE/NRO/FCNR account of the NRI and give the loan to the Indian resident. The second way is by inward remittance from outside India.
- The loan cannot be given for more than three years.
- The rate of interest on such loan is fixed. The rate of interest should not be more than two percent above the Bank Rate prevailing on the day of giving of loan.
- The repayment of the principal amount and the interest can be done only to the NRO account of the NRI.
What are the conditions to be satisfied by residents of India for borrowing in foreign exchange from NRI’s?
A resident of India cannot borrow in foreign exchange from an NRI. However, under certain situations, RBI may permit a person to borrow in foreign exchange from a person outside India. These situations are described below:
- A resident of India can borrow by way of a loan from a bank outside India for execution of any project outside India related to civil construction or for exports
- A resident importer can borrow in foreign currency from the overseas supplier of goods, in foreign currency. However, the loan should be repaid in three years.
- A loan in foreign exchange can also be taken by resident Indians from their close NRI relatives. However, such loan cannot exceed US$ 2,50,000. The loan taken should be free of interest. The minimum period of repayment should be seven years. The loan should be utilized for borrowers’ personal use. The loan cannot be used to buy immovable property or for investment in shares and debentures or for re-lending.
For Indian Companies:
Can an Indian Company borrow from NRIs?
Yes, a company incorporated in India under the Companies Act can borrow money from NRI’s, but only subject to certain terms and conditions.
What are the conditions to be satisfied by Indian companies for borrowing in Indian rupees from NRI’s?
- The borrowing company should not be engaged in agriculture or real estate business or a chit fund company.
- Borrowing can be done only by way of issuing non-convertible debentures. Such issue of a non-convertible debenture is made by public offer.
- The rate of interest payable on such debentures shall not be more than three percent of the interest charged by the State Bank of India while lending. For example: If SBI charges 10% interest to anyone who takes a loan, then the interest payable on debentures issued to the NRI’s by the Indian company cannot be more than 13%.
- The loan should be repaid by the Indian company within three years.
- If the borrowing is on repatriation basis, then the percentage of NCDs issued to NRIs to the total paid up value of all NCDs issued shall not exceed the ceiling prescribed for issue of equity shares/convertible debentures for foreign direct investment in India.
- If the borrowing is on a non-repatriation basis from NRIs, then the amount of loan should be received either by inward remittance from outside India or by debit to NRE/NRO/FCNR(B)/NRNR/NRSR account of the investor maintained with an authorized dealer or an authorized bank in India. Payment of interest and repayment of principal shall be made only to the NRO account of the lender.
What are the procedures to be followed by Indian company while borrowing?
After taking a loan, the borrowing company should submit to the nearest office of the RBI:
- Full details of the remittance received including a list containing name and address of NRIs who have given loan
- Amount and date of money received
- A certificate from the Company Secretary of the Indian company stating that all applicable provisions in regards to issue of Non-Convertible debenture have been followed
Is there any restriction on the company in utilization of funds?
- The loan raised can be utilized only for the own business of borrower.
- The loan raised cannot be used for further investment or further lending to any person or a company. However, it is permitted to keep the loan in fixed deposits with banks till utilization of funds.
What are the conditions to be satisfied by Indian companies for borrowing in foreign exchange from NRI’s?
- An Indian entity can borrow up to US$ five million or its equivalent from an NRI. Such loan can be used only for corporate purpose. The minimum maturity of such loans should be three years.
- An Indian entity can also borrow up to US$ ten million or its equivalent from an NRI, but in such cases, it is only for limited purposes:
- Borrowing for Financing of Infrastructure Projects:
Borrowing in order to finance equity investment in a subsidiary/joint venture company promoted by the Indian entity for implementing infrastructure projects. The minimum average maturity of such loan is three years. In case the loan is to be raised by more than one promoter entity for a single project, the aggregate of the loan by all promoters should not exceed US$ 10 million.
2. Borrowings by Exporter/Foreign Exchange Earner:
Borrowing in foreign exchange by an exporter/foreign exchange earner up to three times of the average amount of his annual foreign exchange earnings during the previous three years subject to a maximum of US$ Ten million or its equivalent, with a minimum average maturity of three years.
3. Long-term Borrowings:
Borrowing for general corporate purposes at the minimum average maturity of eight years.
Other procedures of loan by Indian Companies can be studied at https://blog.ipleaders.in/nbfc-foreign-loan/.
Can an NRI borrow from a resident Indian?
Yes, a resident Indian can give loans to an NRI relative subject to the following terms and conditions:
- The loan should be free of interest.
- Minimum maturity period should be one year.
- The limit of loan is US$ 25.000.
- The loan should be utilized by the NRI for his personal use.
- Loan amount should be credited to the NRO account of the NRI.
Can an NRI borrow from an Indian company?
Yes, an NRI can borrow from an Indian Company subject to the following terms and conditions:
- The loan can be granted only for personal use.
- The loan can be granted for purchasing a housing property in India.
- The loan shall be granted according to the Staff Housing Loan Scheme.
- The lender shall credit the loan amount to the NRIs NRO account.
- The repayment of loan can be done only by way of inward remittance from outside India.
What are the procedures to be followed by an NRI in case a resident of India defaults in payment of loan?
In such a case, he has to file a petition under the Civil Procedure Code, 1908 in a district court or a high court depending upon the amount of loan. The court in such cases pass a decree against the lender directing him to pay the amount and in case of failure to repay, freezes his bank accounts, attaches his property and repays to the NRI. The case of Vijay Malia on default of loan would be interesting to read in this regard https://blog.ipleaders.in/vijay-mallya-case-study/.
Thus, a loan from an NRI can be taken by a resident of India or an Indian Company. Similarly, the loan can be taken by an NRI from a resident of India. The rules and procedures to be followed in such cases have been dealt above. RBI from time to time revises such rules, so one needs to be updated regarding the current rules. This article is based on rules prevalent on December 15, 2017. Any change in the rule is updated by the RBI on its website.
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