By issuing the A.P. (DIR Series) Circular No. 23 dated August
14, 2013 ("Circular 23"), the Reserve
Bank of India ("RBI") had reduced the
overseas direct investment ("ODI") limit
for the India Inc. from 400% to 100% of the net worth of the Indian
entity as per its last audited balance sheet, under the automatic
route. In a positive move for the globalizing Indian corporates,
the RBI has now issued an A.P. (DIR Series) Circular No. 1 dated
July 3, 2014 ("Circular 1") whereby the
said limit has been restated to 400% of the net worth as per the
last audited balance sheet of the Indian entity.
Circular 1 is a welcome change for the Indian corporates that
wish to get a strong foothold overseas; however, the same comes
with a caveat i.e., any ODI or financial commitment of more than
USD 1 billion in a particular financial year will require prior
approval of the RBI, even if such ODI or financial commitment is
within the eligible ODI limit of 400%.
Liberalized Remittance Scheme
Simultaneously with Circular 23, RBI had also issued an A.P.
(DIR Series) Circular No. 24 on August 14, 2013
("Circular 24") which brought down the
threshold of remittance by resident individuals outside India under
the liberalized remittance scheme
("LRS") to USD 75,000 from the erstwhile
applicable limit of USD 200,000 per financial year. Keeping an eye
on the stabilizing Indian rupee, RBI had issued an A.P. (DIR
Series) Circular No. 138 on June 3, 2014 ("Circular
138") under which the said limit for overseas
investments by resident individuals was raised to USD 125,000 from
The detailed impact of Circular 23 and Circular 24 was analyzed
Effect of the change
Increased opportunity for India Inc. to
Globalize: With increased investment
limits under Circular 1, Indian corporates can better diversify
their existing overseas holdings, de-risk their investment
portfolios and also access new technology and innovations overseas.
This will also be coupled with all the incidental benefits of
globalizing domestic businesses and help the ever expanding
business plans of the Indian corporates.
Option to secure finance
overseas: Due to relatively lower
cost of borrowing overseas, Indian corporates prefer that their
overseas subsidiaries raise finance overseas for their business
operations or for making specific acquisitions. Usually, the loan
procured by a subsidiary overseas is secured by a guarantee
provided by the Indian parent entity. Considering that the ability
to provide guarantees was limited due to the changes introduced by
Circular 23, raising finance overseas was impacted. However,
Circular 1 has again relaxed this route of securing alternate
funding overseas for Indian corporates.
Increased foreign investment due to a stable government in the
Indian parliament and increase in foreign exchange reserves has
improved the Indian macroeconomics in the recent past. Circular 1
is a welcome response from RBI to the stimulus provided by this
improvement. These changes would significantly impact outbound
investments by Indian corporates.
On the one hand, the restoration of ODI limits indicates that
RBI is supporting domestic businesses to expand globally and on the
other, RBI is also taking steps to ensure an increase in the
foreign investments into India. RBI had attracted criticism with
the reduction in ODI and LRS limits under Circular 23 and Circular
24, respectively, when it tried to arrest the downfall in the
Indian rupee in 2013 by introducing these capital controls in
India. However, Circular 1 and Circular 138 can be seen as the
right steps to restore RBI's image as a business friendly
regulator. As a next welcome change, RBI may consider restoring the
remittance under LRS to its original limit of USD 200,000 per each
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