What changed
Previously, AD Category-I banks could facilitate FDI by allowing conversion of imported capital goods, including second-hand machinery, into equity shares under the Government route. The RBI has now excluded second-hand machinery from this provision to incentivize the use of modern, energy-efficient technology. All other terms from earlier circulars remain unchanged.
What it means for you
Banks must now ensure that any FDI through conversion of imported machinery into equity is only for new, high-tech, and environmentally compliant equipment. This tightens the eligibility for such investments, potentially reducing the inflow of FDI linked to older machinery. Lenders should update their due diligence processes to verify machinery type and compliance with green standards.
What you must do
- Update internal FDI processing guidelines to exclude second-hand machinery from equity conversion under the Government route.
- Train AD Category-I bank staff to verify that imported machinery for FDI conversion is new, state-of-the-art, and energy-efficient.
- Inform customers and constituents about this change to avoid non-compliant applications.
- Monitor upcoming amendments to FEMA regulations for formal notification of this change.
Who it affects
AD Category-I banks handling FDI transactions, Foreign investors using the Government route for FDI, Indian companies importing machinery for equity conversion
Can we still process FDI for second-hand machinery if it was already in the pipeline before May 8, 2012?
The circular does not specify a grandfathering clause. It applies from the date of issue, so pending applications involving second-hand machinery should be reviewed for compliance with the new restriction.
What qualifies as 'state-of-the-art' and 'green' machinery for this purpose?
The RBI does not define these terms in this circular. Banks should rely on international standards and certifications to assess compliance, and may need to seek legal or technical advice for borderline cases.
Does this circular affect FDI through the automatic route?
No, this circular specifically addresses the Government route for FDI via conversion of imported capital goods. The automatic route remains unaffected unless separately amended.