FEMA perspective on loan given by NRI director in Indian company

 A Private limited company is engaged in the business of rendering Management Consultancy Services. The residential status of one of the directors on the board of the Company is non-resident in accordance with the provisions of FEMA Act, 1999 (Hereinafter referred to as the “Act”). The NRI director is also a shareholder equity Share Capital in the Company. The NRI Director wishes to introduce some amount as a loan. 

1) One way to take loan is ECB i.e. External Commercial Borrowings. That means the borrowings can be made by an Indian Company from its NRI Directors or any person resident outside India by way of External Commercial Borrowings in the following way;

1) Currency of borrowing

a) ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees from the lender who is a person resident outside India.

2) Form of Borrowing:

a) The borrowing can be made in the form of Loans, floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments);

3) Eligibility of borrowers

a) All entities eligible to receive foreign direct investment, in terms of Foreign Exchange Management (Non-debt Instruments Rules 2019, notified w.e.f. 17th October, 2019, as amended from time to time, including Start-ups.

In the present case since the company is engaged in rendering Consultancy services, FDI and in turn ECB is permissible under automatic route.

4) Eligibility of Lender

a) As per A.P. (DIR Series) Circular No. 17 dated 16th January 2019, The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECB, however Individuals as lenders can only be permitted if they are foreign equity holders.

Definition of Foreign Equity Holder as per the regulation is as under :

Foreign Equity Holder means :

(a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity,

(b) indirect equity holder with minimum indirect equity holding of 51%, or

(c) group company with common overseas parent.

If the NRI director qualifies the definition of Foreign equity holder then he will be considered as Eligible lender.

Draw-downs of borrowing under this shall be made only after obtaining the loan registration number from the Reserve Bank or from the ADs, as per the system put in place by the Reserve Bank. For non-adherence, the borrower may be required to pay penalty as specified by the Reserve Bank from time to time.

To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank.

The borrowers are required to report actual ECB transactions through Form ECB 2 through AD Bank

Another way for accepting loan from NRI Director can be acceptance of deposits as per Foreign Exchange Management (Deposit) Regulations, 2016 on non repatriation basis subject to some conditions