Thursday, September 5, 2013

RBI Clarification on Overseas Investment Norms

In a previous post, Satyajit had discussed the Reserve Bank of India’s (RBI) policy measures announced on August 14, 2013 to restrict overseas direct investments (ODI). Primarily, it was decided to reduce the ODI limits of a company from 400% of its net worth to 100%.

Yesterday, the RBI announced some clarifications that mitigate the severity of the above restrictions. First, it clarified that the restrictions would apply only prospectively. Hence, all financial commitments made on or before August 14, 2013 would be preserved and the erstwhile 400% limit would apply to them. Second, the higher limit of 400% will be retained for ODI through external commercial borrowings (ECB). Third, it has been clarified that the limit of financial commitments will not be applicable to funding out of the EEFC account of the Indian company or out of funds raised by way of depository receipts (ADRs/GDRs). Several other clarifications have been issued by the RBI in response to queries raised by the parties.

In addition, the RBI has also eased the end-use restriction for ECB from foreign equity holders in the borrower companies. Hence, ECB can be availed in such circumstances even for general corporate purposes so long as specified conditions are satisfied.

These suggest that the RBI is keen to maintain a balance between controlling the foreign exchange flows, but at the same time in permitting normal business and financing activity. RBI’s press release accompanying these changes expressly articulates that such measures were necessary in view of the current macro-economic situation. However, it appears that the intention is for RBI to allow bona fide and genuine ODI transactions.

No comments: