Wednesday, August 14, 2013

RBI revises overseas investment norms

The RBI has just announced the following measures today:

(i) It has reduced the limit for Overseas Direct Investment (ODI) under automatic route for all fresh ODI transactions, from 400% of the net worth of an Indian Party to 100% of its net worth. These provisions shall come into effect with immediate effect and would apply to all fresh Overseas Direct Investment proposals on a prospective basis but would not apply to the existing JV/WOS set up under the extant regulations.

(ii) It has also reduced the limit for remittances made by Resident Individuals, under the Liberalised Remittance Scheme (LRS Scheme), from USD 200,000 to USD 75,000 per financial year. Resident Individuals have, however, now been allowed to set up Joint Venture (JV)/Wholly Owned Subsidiary (WOS) outside India under the ODI route within the revised LRS limit.

(iii) While current restrictions on the use of LRS for prohibited transactions, such as, margin trading and lottery would continue, use of LRS for acquisition of immovable property outside India directly or indirectly will, henceforth, not be allowed.

The expressed intention behind these measures is to moderate outflows. The RBI press release further states that entities ought to approach the RBI for approval for any genuine requirements beyond these limits. 

While we will carry out a detailed analyses of the impact of such measures, a few quick thoughts that arise:

(a) Will the language that the provisions "would not apply to the existing JV/ WOS set up under the extant regulations" imply that these JV/WOS entities can continue to benefit from the 400% cap as opposed to the 100% one? 

(b) Since the circular uses the term overseas "direct investment" and not "total financial commitment" - which is used in the ODI master circular and has a wider import (to include investments, loans and financial guarantees issued by the Indian party, guarantees issued by the AD and 50% of performance guarantees issued by the Indian party), could it be argued that the reduced 100% limit is applicable only to equity investments made by the Indian party in an offshore JV/WOS and not to other kinds of financial commitments made by the Indian party?

(c) It's important to note that while the ODI route did not permit acquisition of companies engaged in the real estate business (defined therein), the erstwhile LRS regime did permit a resident individual to acquire immovable property outside India. This permission has now been withdrawn.

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