As per Section 6(3)(e) of FEMA & FEM (Borrowing and Lending) Regulations, 2018
Introduction
Indian companies and persons other than companies may borrow in Indian Rupees (INR) from Non-Resident Indians (NRIs) or Overseas Citizens of India (OCIs), subject to terms and conditions prescribed under Section 6(3)(e) of FEMA read with the FEM (Borrowing and Lending) Regulations, 2018.
The Reserve Bank of India (RBI) has issued Master Direction No. 6/2015-16 dated January 1, 2016 consolidating the regulations on borrowing and lending transactions in INR between residents and NRIs/OCIs. Reporting guidelines are detailed in Master Direction No. 18 dated January 1, 2016.
1. Regulatory Framework
Borrowing and lending transactions in INR between persons resident in India and NRIs/OCIs are governed by:
- Section 6(3)(e) of FEMA
- FEM (Borrowing and Lending) Regulations, 2018 (as amended)
- RBI Master Directions mentioned above
2. Borrowing in INR by Indian Companies from NRIs/OCIs
A company incorporated in India may borrow INR, on either repatriation or non-repatriation basis, subject to the following conditions:
Key Terms and Conditions
- (a) The borrowing company shall not engage in:
- Agricultural, plantation, or real estate business;
- Trade in transferable development rights (TDR);
- Operating as a Nidhi or chit fund company.
- (b) Borrowing shall be through issuance of Non-Convertible Debentures (NCDs).
- (c) The NCDs shall be issued by public offer.
- (d) The rate of interest shall not exceed the SBI Prime Lending Rate (PLR) as on the date of the board resolution approving the issue, plus 3%.
- (e) The minimum tenure of the loan shall be 3 years.
2.1 Borrowing on Repatriation Basis
- NCDs issued to NRIs/OCIs shall not exceed the foreign direct investment (FDI) ceiling applicable for equity shares/convertible debentures of the company.
- Funds must be received by inward remittance from abroad or by debit to NRE/FCNR(B) accounts of the investor maintained with authorised dealers or banks in India.
2.2 Borrowing on Non-Repatriation Basis
- Funds shall be received by inward remittance or debit to NRE/NRO/FCNR(B) accounts of the investor maintained with authorised dealers/banks in India.
- Interest payments and principal repayments shall be made only to the NRO account of the lender.
3. Borrowing in INR by Persons Other Than Companies from NRIs/OCI
A resident individual or entity (other than a company) may borrow INR from NRIs/OCIs, subject to:
- (a) The loan and interest are non-repatriable.
- (b) Borrowing only on a non-repatriation basis.
- (c) Loan funds received via inward remittance or debit to NRE/NRO/FCNR(B) accounts of the lender maintained with authorised dealers/banks in India.
- (d) Loan tenure shall not exceed 3 years.
- (e) Interest rate shall not exceed 2% above the prevailing Bank Rate on the date of loan availing.
- (f) Interest and principal repayments shall be made only to the NRO account of the lender.
4. Restrictions on Use of Borrowed Funds
- 4.1 Own Business Use Only
Proceeds of the loan must be utilised exclusively for the borrower’s own business purposes. - 4.2 No Farmhouse Construction
Borrowed funds cannot be used for farmhouse construction. This restriction excludes development of townships, residential/commercial premises, roads, or bridges. - 4.3 No Investment or On-Lending
Proceeds must not be used for investment or on-lending in any manner. RBI may permit on-lending only to the infrastructure sector or allow temporary placement in fixed deposits with banks pending utilisation.
5. Reporting Requirements for Borrowers
5.1 Reporting by Borrowing Companies
Companies must file with RBI within 30 days of receipt of funds:
- (a) Names and addresses of NRIs who have remitted funds, categorized by repatriation/non-repatriation basis.
- (b) Amount and date of remittance, and its INR equivalent.
- (c) Names and addresses of authorised dealers through whom funds were received.
Companies shall also:
- Issue NCDs within 30 days.
- Submit details of NCD allotment (names, addresses, number of NCDs per investor) and a Company Secretary’s certificate confirming compliance with applicable regulations within 30 days.
6. Change of Status of Borrower/Lender
6.1 Borrower Becomes Non-Resident
If a borrower resident in India obtains a loan and later becomes a non-resident, the authorised dealer may allow the loan/overdraft to continue till maturity, provided repayment is made by inward remittance or debit to NRE/FCNR(B)/NRO accounts.
6.2 Lender Becomes Non-Resident
If a lender resident in India becomes non-resident after granting a loan to a resident borrower, repayment shall be credited to the lender’s NRO account.
7. Overdraft by Authorised Dealers to Their Overseas Branches
An authorised dealer may grant temporary overdrafts on INR accounts maintained with its overseas branches, correspondents, or Head Office up to a limit of Rs. 5 crore (INR 500 lakhs), subject to RBI terms. The aggregate overdrafts across all such accounts shall not exceed this ceiling.
