Tuesday 20 August 2013

Changes to the Exchange Control Regulations

 
In a growing list of concerted efforts being made to address the issue of burgeoning Current Account Deficit and the fall of the Rupee, the Reserve Bank of India (“RBI”) has through a press release and circulars[1] dated August 14, 2013, made far reaching changes to the rules governing Overseas Direct Investment (“ODI”) and The Liberalized Remittance Scheme (“LRS”). We have in this alert summarized the key changes and the related impact.


Changes to the ODI regime


Prior to the amendment, subject to some restrictions, Indian corporates were allowed to invest upto 4 times their net worth in setting up joint ventures (“JV”) and wholly owned subsidiaries (“WOS”) outside India, under the automatic route. The limit for ODI under the automatic route for all fresh ODI transactions has been capped at 100 percent of the net worth of an Indian party. The Circular issued clearly lays down that the new limit would be applicable for all the prospective investments and would not affect the investments which have already been made. It also appears that further investments in a JV or WOS already set up should continue under the earlier limits, although the Circular is not entirely clear on this. The revised limit also applies to overseas investments in the energy and natural resources sectors; it would however, not affect investments by Navaratna public sector undertakings. Proposed ODI in excess of the prescribed limit of 100 percent would be considered by the RBI on a case to case basis.


Changes to the LRS


Resident individuals were allowed to invest up to a limit of USD 200,000 per financial year under the LRS for all permitted current and capital account transactions. The limit has now been reduced to USD 75,000 per financial year for permitted purposes. Further, a new limitation has been imposed to restrict the use of LRS by residents for acquisition of immoveable property abroad, directly or indirectly.

In addition to prescribing the new limit, RBI has, through the amendment, also permitted residents to set up joint ventures and wholly owned subsidiaries (subject to certain restrictions) by utilizing the limits under the LRS.

The relevant notifications to bring about the changes are expected to be issued in due course.

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