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ECB violations: FERA cases to be dropped

Shaji Vikraman

NEW DELHI, June 12

THE Reserve Bank of India and the Government have decided not to proceed under the erstwhile Foreign Exchange Regulation Act (FERA) against top corporates, who had been served notices earlier for violating the guidelines on external commercial borrowings (ECBs).

The ECB guidelines state that a company raising loans from the overseas markets can retain it abroad until the capital expenditure is incurred for a period of one year. Retaining the funds for a longer spell would require the approval of the RBI.

Although some top corporates had not repatriated the funds within the stipulated time, leading to violation of the ECB guidelines in 1999-2000, the RBI has communicated to the Finance Ministry its in-principle decision not to treat these cases as a violation of the FERA, senior Finance Ministry officials said.

The Foreign Exchange Management Act (FEMA) which replaced the FERA in 2000 had a sunset clause which provided a two-year time frame for the Enforcement Directorate to file chargesheets relating to violations committed when FERA was in force.

The sunset clause lapsed on May 31, 2002 by which time the ED had issued notices to thousands of companies.

In early 2000, the Government and the RBI served a notice to Reliance Industries Ltd (RIL) on the violation of the ECB guidelines.

The company which had retained funds abroad for well over a year was then forced to repatriate funds aggregating $1.3 billion. Around the same time, a few other companies such as Tata Steel and Sterlite had also sought approval for retaining the funds raised by them through ECBs. Subsequently, all these companies had to repatriate their proceeds.

In the case of RIL however, the Finance Ministry decided to withdraw the withholding tax exemption which is granted to all companies on a case-to-case basis when an ECB proposal is approved.

According to senior government officials, this was also due to the fact that the company had not adhered to the investment pattern stipulated by the RBI when the money is retained abroad.

The funds raised by companies have to be mandatorily placed in P1 or P2 instruments which are gilts, certificate of deposits or bank deposits with a top credit rating.

Although RIL challenged the Finance Ministry's decision, the Delhi High Court recently rejected the company's petition.

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