Under FEMA, Borrowing and Lending Regulations, and RBI Master Directions

1. Introduction

Indian companies and persons other than companies may borrow in Indian Rupees (INR) from Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) after satisfying the terms and conditions stipulated under Section 6(3)(e) of the Foreign Exchange Management Act (FEMA), read with the Foreign Exchange Management (Borrowing and Lending in INR) Regulations, 2018, as amended from time to time.

The Reserve Bank of India (RBI) has issued consolidated guidelines through Master Direction No. 6/2015-16 dated January 1, 2016 on “Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and NRIs/OCIs.” Reporting requirements are detailed in Master Direction No. 18 dated January 1, 2016.

2. Borrowing in INR by Indian Companies from NRIs/OCIs

An Indian company may borrow in INR, either on a repatriation basis or non-repatriation basis, from NRIs/OCIs subject to the following conditions:

(a) Restrictions on Borrowing Companies

The borrowing company must not engage in the following businesses:

• Agricultural or plantation activities
• Real estate business (excluding permitted activities such as township development)
• Trading in transferable development rights
• Activities as a Nidhi or Chit Fund company

(b) Mode and Terms of Borrowing

• Borrowing shall be by issuance of Non-Convertible Debentures (NCDs) only.
• NCD issuance must be made through a public offer.
• The interest rate on NCDs shall not exceed the State Bank of India (SBI) prime lending rate + 3%, as on the date of the General Body Meeting resolution approving the issue.
• The minimum tenure of the loan shall be three years.

2.1 Borrowing on a Repatriation Basis

• The total amount of NCDs issued to NRIs/OCIs on a repatriation basis must not exceed the sectoral ceiling applicable for FDI equity participation in the company.
• Funds must be received through inward remittance from abroad or by debit to the lender’s NRE/FCNR(B) account maintained with an authorised bank in India.

2.2 Borrowing on a Non-Repatriation Basis

• Loan amount can be received via inward remittance or debit to NRE/NRO/FCNR(B) accounts of the lender.
• Interest and principal repayments must be made only to the lender’s NRO account.

3. Borrowing in INR by Persons Other Than Companies from NRIs/OCIs

A resident person (not an incorporated company) may borrow INR from NRIs/OCIs subject to:

• The loan and interest are non-repatriable.
• Borrowing only on a non-repatriation basis.
• Loan amount must be received by inward remittance or debit to the lender’s NRE/NRO/FCNR(B) account.
• Loan tenure shall not exceed 3 years.
• Interest rate shall be no more than 2% above the prevailing Bank Rate at the time of loan availing.
• Interest and principal payments to be made only to the lender’s NRO account.

4. Restrictions on Use of Borrowed Funds

• Proceeds must be used only for the borrower’s own business activities.
• Borrowed funds cannot be used for constructing farmhouses; however, use in township development, residential/commercial premises, roads, or bridges is allowed.
• Funds cannot be used for investment or lending except:
  • On-lending to infrastructure sector with prior RBI approval
  • Depositing in fixed deposits with banks in India pending utilization for permitted end-use

5. Reporting Requirements

5.1 For Borrowing Companies

• Submit details of remittances received for investment in NCDs to the nearest RBI office within 30 days of receipt.
• Report to include:
  • Names and addresses of NRI investors
  • Amount, date, and rupee equivalent of remittance
  • Authorised dealer details
• Issue NCDs within 30 days and submit a certificate from Company Secretary confirming compliance with applicable provisions along with details of NCDs issued.

6. Change of Status of Borrower or Lender

6.1 Borrower Becomes Non-Resident

• The authorised dealer may allow continuation of loans/overdrafts till maturity, with repayment out of inward remittance or NRE/FCNR(B)/NRO accounts of the borrower.

6.2 Lender Becomes Non-Resident

• Resident borrower repays loans by crediting the NRO account of the lender.

7. Overdraft Facilities by Authorised Dealers to Overseas Branches

• Authorised dealers may grant temporary overdrafts up to INR 5 crore (50 million) on INR accounts maintained by their branches, correspondents, or Head Office outside India, subject to RBI conditions.
• The INR 5 crore limit applies cumulatively across all such overseas accounts.