Pursuant to regulation 7 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004, (the "Regulations"), regulated Indian entities engaged in financial services activities in India and investing in entities engaged in the financial sector overseas were required to comply with the following conditions:
be registered with the appropriate regulatory authority in India for conducting the financial sector activities,
have earned net profit during the preceding three financial years from the financial services activities,
have obtained approval for investment in financial services activities abroad from the concerned regulatory authorities in India and abroad, and
have fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.
Accordingly, regulated entities engaged in the financial service activities in India, investing in non-financial service activities overseas, were not required to comply with the conditions stipulated above.
With a view to assess the impact of overseas operations of such regulated Indian entities in the financial sector, the Reserve Bank of India vide its Notification dated 6th September 2006 ("Notification"), has amended the Regulations, in terms of which, Indian entities seeking to make investments in entities engaged in any activity overseas, and not limited to financial sector activities, would have to comply with the conditions as set out above.
Under the said Notification, it was clarified that trading in overseas Commodity Exchanges and the establishment of Joint Ventures/Wholly Owned Subsidiaries for the purpose of trading in Commodity Exchanges abroad would be regarded as financial services activities for which regulatory clearances would have to be obtained from the Forward Markets Commission.
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