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Nishith Desai Associates – Legal and Tax Counselling Worldwide
Globalizing India Inc.
August 22, 2013

RBI cuts down overseas investment limits to protect Rupee

Time for India to think beyond capital controls


As an immediate measure to bolster the weakening Indian rupee, the Reserve Bank of India (“RBI”) has substantially limited the ability of Indian companies and resident individuals to invest and remit funds overseas. Resident individuals can now remit only up to USD 75,000 (reduced from USD 200,000) per financial year1. Corporates can make overseas direct investments (“ODI”) only to the extent of 100% (reduced from 400%) of their net worth2.

With Indian corporates and families actively seeking to globalize and de-risk their portfolios, these changes will create fresh challenges in the pursuit of business and investment opportunities overseas. The new amendments have also created certain ambiguities which need to be addressed. While liberalization has always received a favorable response from the industry, capital controls usually dampen sentiments and shake the confidence of businesses and investors.

The circulars issued by RBI have introduced amendments to the FEM (Transfer and issue of any foreign security) Regulations, 2004 (“ODI Regulations”) and the Liberalized Remittance Scheme (“LRS”). These changes would significantly impact outbound investments by Indian companies and individuals. Other key changes include a prohibition on resident individuals to acquire foreign immovable property under LRS and permission to set up overseas wholly owned subsidiaries or joint ventures within the revised LRS limit.


Restrictions on ODI


Overseas investments by Indian parties are regulated by RBI under the ODI Regulations. The ODI framework enables Indian parties to set up joint ventures and wholly owned subsidiaries overseas subject to fulfillment of certain conditions. Subject to the limits discussed below, an Indian party may invest into the share capital of a foreign company and also extend a loan or give a guarantee to such company.

ODI was permitted by RBI with a view to allow Indian companies to globalize by expanding their business overseas and also promote mutual economic co-operation between India and other countries. Initially, ODI was permitted under the automatic route (i.e. without prior approvals) up to 100% of the net worth of the Indian party as on the date of its last audited balance sheet. The limits were increased to 200%, 300% and finally 400% in 2007. The object of liberalizing the ODI regime was to increase outbound investments by Indian companies thereby stimulating their growth, allowing access to and sharing of technology, promotion of brand value, and other benefits.

In addition to the limit on financial commitment (equity and loan), other notable conditions governing ODI include: 1) the foreign entity receiving investment should carry on a bona fide business activity, 2) the Indian party is not on RBI’s exporters caution list, etc., 3) the foreign entity is not engaged in real estate or banking business, 4) the Indian party shall route all transactions relating to the ODI through a single designated branch of an authorized dealer in India, and 5) the Indian party should make certain annual filings in relation to the ODI.

The ODI Regulations also allow a company listed in India to invest in an overseas listed company, provided the investment is limited to 50% of the Indian company’s net worth.

As per the recent circular issued by RBI, the total financial commitment by Indian parties for purposes of ODI has been reduced from 400% of net worth to 100%. Thus, any Indian party that intends to set up an overseas joint venture / wholly owned subsidiary or enhance its foreign holdings, beyond 100% of its net worth would now have to seek prior RBI approval.

This restriction also applies to Indian companies investing in overseas unincorporated entities in the energy and natural resources sectors. These limitations however would not apply to ODI by certain public sector companies.

The ODI circular clarifies that the changes shall apply prospectively to all fresh ODI proposals, and should not impact existing joint ventures or wholly owned subsidiaries outside India.


Restrictions under LRS


LRS was introduced way back in 2004 as a step towards simplification and diversification of the foreign exchange facilities for resident Indian individuals. Indian families are becoming increasingly global and may need to remit funds outside India for various legitimate purposes.

Initially, remittance under LRS was capped at USD 25,000 per calendar year for any permitted current account or capital account transaction.3 Over the years, this monetary limit has been increased to USD 50,000 in 20064 and USD 100,000 in 20075. The cap was expanded to USD 200,000 in the same year, a limit that was maintained since then.

The recent circular issued by RBI has brought about the following changes to the LRS regime, which will take effect prospectively:

Reduction in limit: RBI has reduced the existing limit on remittances by resident individuals outside India from USD 200,000 to USD 75,000 per financial year for any permitted current account, capital account or combination transaction.

Prohibition on acquisition of immovable property: It has further been clarified that LRS cannot be used by resident individuals to acquire immovable property, whether directly or indirectly, outside of India.

Restriction on gifts: Gifts and loans provided by Indian resident individuals to their close relatives overseas will also be subject to the USD 75,000 limit.

Setting up of joint ventures/ wholly owned subsidiaries: The LRS circular has clarified that resident Indian individuals may set up joint ventures/ wholly owned subsidiaries overseas within the investment limit of USD 75,000. Prior to this, the only method by which a resident individual could establish shareholder control over a foreign entity was by acquiring such entity from a third party.


Concluding thoughts


The new limitations on ODI and remittances under LRS are primarily driven by RBI’s concerns regarding India’s current macroeconomic situation and the weakening rupee. However, the question is whether such short term remedies may create more damage in the long run. Instead of introducing new capital controls in India, we should consider whether the real answer to a sluggish economy lies in stimulating investments, reducing bureaucratic controls, winning investor confidence and creating more certainty across all areas of law (including taxation law).

It is hoped that the new restrictions are just temporary measures and should be done away with immediately once the rupee stabilizes.

Indian corporates and individuals have been actively looking to make overseas investments, tap new markets with a view to diversify existing holdings, de-risk investment portfolios, and also access new technology and innovations. Restrictions on ODI and remittances under LRS will significantly hamper such objectives.

Several Indian corporates and individuals have also raised finance or obtained loans overseas especially considering that the cost of borrowing is significantly lower than in India. The loans may be raised by the overseas subsidiaries for business operations or for making specific acquisitions. Usually, the loans are secured by a guarantee provided by the Indian party. Due to the new changes, overseas funding avenues may also get affected, considering that the ability to provide guarantees would also be limited to the limitation of 100% net worth (for companies or firms) or USD 75,000 (for individuals).

It should be noted that the limitations apply prospectively. Therefore, any prior investment under the ODI regime or LRS should not be impacted. However, difficulties may arise if a foreign asset (including securities or immovable property) was acquired earlier through an overseas loan, since payment of installments would now be subject to the reduced caps.

Going forward, resident individuals cannot directly or indirectly acquire immovable property outside India. The restriction may extend to acquisition of immovable property though an overseas SPV held by the individual. Although there is some ambiguity, the restriction may also apply to acquisition of immovable property using an overseas loan, as long as the loan is being serviced through remittances from India under LRS.

In the recent years, Indian corporates have made big ticket overseas acquisitions to the tune of billions of dollars. These include Tata’s acquisition of Corus and Jaguar, Bharti’s acquisition of Zain and the ongoing acquisition of Cooper Tyres by Apollo. The new restrictions on ODI and LRS remittances put a spoke in the wheel of India Inc’s globalization plans. It may even push Indian MNCs to retain overseas profits outside India, which would further reduce the availability of capital for growth in India.

True, for making overseas investments into bona fide business activities beyond the reduced limits, Indian investors can approach RBI and present a case for approval. However, this goes against the spirit of liberalization initiated in 1991 which led to the significant dismantling of exchange controls since 2000. The trend of liberalization marked by the elimination of the ‘license permit raj’ helped India achieve record growth rates and made it one of world’s most important destinations for investments. It has helped Indian companies to develop world class brands and become truly global players.

Short term palliatives in the form of capital controls (effectively applying to only a segment of domestic investors) may create longer term damage in terms of eroding overall investor sentiments. In a world driven by perception, there is a need to take a more holistic outlook for reform and introduce structural changes to boost the confidence of investors, both domestic and internationally.


- Shipra Padhi, Mahesh Kumar and Kishore Joshi
You can direct your queries or comments to the authors


1 RBI/2013-14/181, A. P. (DIR Series) Circular No.24

2 RBI/2013-14/180, A. P. (DIR Series) Circular No.23

3 RBI/ 2004/39, A.P. (DIR Series) Circular No. 64

4 RBI/2006-07/216, A.P. (DIR Series) Circular No.24

5 RBI/2006-2007/379, A. P. (DIR Series) Circular No. 51


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