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Tuesday, October 30, 2007

Updates on RBi Circular & investment by NRI, FII & PIO

Dear All,
Updates on RBI circular and FEMA;
1. Guidelines for issuing preference shares as part of regulatory capital by the banks

All of you may be aware of that the RBI vide its circular no. DBOD.No.BP.BC.57/21.01.002/2005-06 dated January 25, 2006 enhanced banks' capital raising options for capital adequacy purposes. With a view to providing a wider choice of instruments to Indian banks for raising Tier I and Upper Tier II capital.

Further vide DBOD.No. BP. BC. 42 /21.01.002/2007-2008 dated 29th October 2007, it has been decided to allow the banks to issue the following types of preference shares in Indian Rupees, subject to extant legal provisions as per guidelines herewith enclosed.

i) Tier I capital

Perpetual Non-Cumulative Preference Shares (PNCPS)

ii) Upper Tier II capital

a) Perpetual Cumulative Preference Shares (PCPS)
b) Redeemable Non-Cumulative Preference Shares (RNCPS)
c) Redeemable Cumulative Preference Shares (RCPS)

2. The Perpetual Non-Cumulative Preference Shares will be treated on par with equity, and hence, the coupon payable on these instruments will be treated as dividend (an appropriation of Profit & Loss Account). All other types of preference shares mentioned above will be treated as liabilities and the coupon payable thereon will be treated as interest (charged to Profit and Loss Account).

3. The addition of above instruments is expected to significantly enhance the range of eligible instruments available to the banks for capital adequacy purposes. Hence, it is not considered necessary to allow the banks to issue preference shares in foreign currency in overseas markets at this stage.

2. Investment in Indian Companies by FIIs/NRIs/PIOs


As per Foreign Exchange Management (Transfer Or Issue Of Security By A Person Resident Outside India) Regulations, 2000 amended till date,foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India.

The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per centfor NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India.

The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing a resolution to that effect.

The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs.

The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to:

- the total purchase of all NRIs/PIOs both, on repatriation and non-repatriation basis, being within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and

- the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company.

Monitoring Foreign Investments

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent.

Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the `caution' and the `stop purchase' in these companies through a press release.

The current list of companies allowed to attract investments from FIIs/NRIs/PIOs with their respective ceilings you can find in below link:

Thanks & Regards


Pramod said...

I have joined CS, and is in the process of attempting the June 08 session.

I would appreciate if you can share some of the documents or materials.

Your blog is very informative but if you could share some of your notes / materials that would help others like me a lot in preparation.



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