Capital curbs feeding cynicism

Aug 23 2013, 02:31 IST
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SummaryRBI’s restrictions will significantly impact the ability of Indian companies to invest abroad

Through a recent move that reeks of the pre-1991 era of capital controls, RBI has severely restricted the liberalised remittance scheme (LRS) window available to resident individuals to make investments in offshore assets. It has also announced reforms restricting avenues for overseas direct investments (ODI) by Indian companies. The purported rationale behind reintroducing capital controls on overseas investments is to curb outflow of foreign exchange with a view to cure the ailing rupee.

Prior to the recent amendments introduced by RBI (on the eve of the Independence Day), resident individuals had been permitted to make overseas investments of up to $200,000 per financial year under LRS, without any requirement of RBI approval. With the amendments, the limit on overseas remittance has now been significantly reduced to $75,000 per financial year. Acquisition of immovable property abroad, whether directly or indirectly, allowed under the erstwhile LRS regime, has also been disallowed under the revised prescription.

Notably, RBI has now allowed overseas remittance of funds within the revised LRS limit of $75,000 per year for purposes of setting up a joint venture/wholly-owned subsidiary abroad (JV/WOS), subject to the target company being an operating entity, with a clear restriction on the acquisition or setting up of a step down subsidiary by the JV/WOS. In 2010, RBI had clarified on its website that resident individuals could not use LRS to ‘set up’ companies offshore. Additionally, through a rather innocuous tweak to the July 1, 2013, master circular on Miscellaneous Remittances from India, RBI had effectively closed the LRS window for resident individuals looking to acquire securities of unlisted offshore companies. Permitting overseas investments by resident individuals in foreign securities of a JV/WOS abroad is a welcome change on account of the growing uncertainty in the minds of the Indian investors seeking to utilise LRS for making investments in securities of offshore unlisted companies (portfolio investments in listed companies has always been permitted by RBI). However, the general reduction of investment limit under LRS will continue to act as a dampener on the opening of this investment option as well.

While resident individuals will need to contend with the new restrictions at the time of planning their exposure in overseas assets, on account of amendments made to the ODI regime (applicable to Indian companies), the ability of Indian companies to invest abroad has also been adversely and significantly impacted. Hitherto, an Indian company could invest in a JV/WOS abroad

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