Volume 5, Issue 1

11 September 2013

Business Alert
Rationalisation of Outward Remittances and Repatriation by Resident Indians

One of the key steps that the Reserve Bank of India (RBI) has taken to halt the depreciation of the rupee has been to significantly restrict outward remittances of Indian business houses and individuals.   Some of the significant restrictions that the RBI has put in place are briefly discussed in this alert.   

Reduction of limit for investment in Overseas Joint Venture/Wholly Owned Subsidiary (JV/WOS)

Until now, an Indian Party could invest in an overseas JV/WOS under the automatic route if the proposed investment along with all existing overseas investments was within 400% of the net worth of the Indian company, based on the last audited balance sheet.

By way of Circular No. 23 dated 14 August 2013, the RBI has reduced this limit from 400% to 100%, with effect from 14 August 2013.  This reduction in limit, however, would not apply to overseas investments by Navratna Public Sector Units (PSUs), ONGC Videsh Limited and Oil India Limited in overseas unincorporated entities and incorporated entities, in the oil sector.

As a measure of providing partial relief, investments made prior to 14 August 2013 will be governed by the 400% limit while any fresh investments will be governed by the revised limit.  However, the wording of the circular left room for ambiguity resulting in varied interpretations of the restriction as well as relaxation, by various stakeholders. In order to provide some clarity, the RBI issued Circular No. 30 dated 4 September 2013 stating the following:

  • Fresh investments will include remittances after 14 August 2013.  Thus, if the existing overseas investment along with the proposed investment is/will be more than 100% of the net worth, then such investment will require RBI approval. (FAQ No. 1)
  • In case the Indian Party has contracted/committed any amount prior to 14 August 2013, then remittance towards such amount will be governed by the earlier limit of 400% of net worth, under the automatic route. However, the Authorised Dealer (AD) bank would need to verify the authenticity of the document and it must also report such cases to the RBI after remittance of funds. (FAQ No. 2)
  • All applications received on or before 14 August 2013 will be governed by the earlier limit of 400% of net worth (even if remittances under such applications are made post 14 August 2013). (FAQ No. 4)
  • The limit of 400% of net worth would continue to operate for financial commitments funded by way of eligible External Commercial Borrowings raised by the Indian Party.

Amendment to the Liberalised Remittance Scheme (LRS)

Reduction in limit Until 14 August 2013, Indian Resident Individuals (including minors) were allowed to remit up to USD 200,000 per financial year for permitted current account transactions and capital account transactions. With Circular No. 24 dated 14 August 2013, the RBI has reduced this limit to USD 75,000 per financial year.

Acquisition of immovable property overseas – Earlier, resident individuals were allowed to purchase immovable property outside India by way of remittances under the LRS. However, the acquisition of immovable property (directly or indirectly) by way of remittances under the LRS is no longer permitted. 

The RBI has clarified by way of Circular No. 32 dated 4 September 2013 that if an individual has acquired immovable property outside India on an instalment basis, then such individuals would be allowed to remit funds towards the instalment, subject to the reduced limit of USD 75,000 per financial year under the LRS. AD banks must verify the genuineness of such transactions and report the same to the RBI post facto.

Incorporation of a company outside India by way of remittance under the LRS – In 2010, the RBI issued FAQs on the LRS where it was mentioned that the incorporation of a company by Indian Resident Individuals by way of remittance under the LRS is prohibited. However, this is now permitted with effect from 5 August 2013 (Notification FEMA 263/2013-RB dated 5 March 2013, published in the Official Gazette on 5 August 2013).

Some key requirements/obligations/restrictions under this Notification include:

  • Various filing formalities prescribed; 
  • The overseas entity cannot invest /set up a step-down subsidiary;
  • A lock-in period of one year from the date of first remittance is prescribed before divestment by the resident individual;
  • No write-off will be allowed in case of divestments by resident individuals.

Additional remittances for current account transactions The RBI has clarified vide Circular No. 32 dated 4 September 2013, that remittance under the LRS scheme is in addition to the limits prescribed under Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (some of the key limits pertain to expenses for medical treatment abroad, remittances for studies abroad, etc.)

SKP’s Comments

Restrictions on overseas investments are bound to stifle overseas expansion plans of Indian business houses.  Although the RBI has affirmed that these are short-term restrictions, there is no clarity on how soon these restrictions will be lifted and whether the limits will subsequently be restored to the original limits. 

While the clarifications provided by the RBI within three weeks of issuing the circulars are welcome, further clarity on some of the other ambiguous aspects is required.