9 July 2014 | Volume 6 Issue 5
Increase in limits: LRS and Outbound Investment
In August 2013, with a view to ease the pressure on the Indian rupee vis-à-vis the US dollar, the Reserve Bank of India (RBI) had reduced certain limits as under:
  • The remittance limit under the Liberalised Remittance Scheme was reduced from USD 200,000 to USD 75,000 (A. P. (DIR Series) Circular No. 24) and
  • For Overseas Direct Investment (ODI) by an Indian party, the limit of 400% of the net worth of Indian party was brought down to 100%.
These strong steps were taken to safeguard the depreciating currency. Now, since the Indian rupee has stabilised (relatively) against the USD, the RBI has increased these limits.  

Increase in limit under the Liberalised Remittance Scheme (LRS)
By way of a circular issued on 14 August 2013, the RBI had reduced the limit under LRS from USD 200,000 to USD 75,000 per financial year. This limit has now been enhanced to USD 125,000 per financial year with immediate effect (i.e. effective from 3 June 2014) vide A.P. (DIR Series) Circular No.138.

All other terms and conditions remain unchanged.

Restoration of limit for investment in Overseas Joint Venture/Wholly Owned Subsidiary (JV/WOS)
Until 14 August 2013, an Indian party could invest in an overseas JV/WOS under the automatic route if the proposed investment (i.e. financial commitment) along with all the existing overseas investments was within 400% of the net worth of the Indian company, based on the latest audited balance sheet.

For this purpose, Financial Commitment means the amount of direct investments outside India by an Indian party: By way of contribution to equity shares of the JV/WOS abroad, as loans to its JV/WOS abroad, 100% of the amount of corporate guarantee issued on behalf of its overseas JV/WOS, 50% of the amount of performance guarantee issued on behalf of its overseas JV/ WOS; Bank guarantee/standby letter of credit issued by a resident bank on behalf of an overseas JV/WOS  of the Indian party, which is backed by a counter guarantee/collateral by the Indian party; and Guarantee given on behalf of the first step-down subsidiary.

By way of a circular (A.P. (DIR Series) Circular No.23 dated 14 August 2013), the RBI had reduced this limit from 400% to 100%.  Based on a review by RBI, it has now been decided to restore the investment limit from 100% to the earlier limit of 400%) with immediate effect (i.e. effective from 3 July 2014) vide A.P. (DIR Series) Circular No.1 dated 3 July 2014.

It may be noted that theses changes have come with a rider that any investment (financial commitment) exceeding USD 1 billion or its equivalent will require RBI approval even when the investment is within the 400% limit.

All other terms and conditions remain unchanged.
SKP's Comments
This is a welcome move by the RBI that will provide relief to a great extent to resident individuals as well as business houses. Many business houses had faced challenges in funding their overseas JV/WOS on account of the reduction in ODI limit. It would be interesting to see what criteria would be considered by the RBI while processing the applications where the investment is likely to cross USD 1 billion or its equivalent. 

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