India: Investments Through The Liberalised Remittance Scheme Of The RBI

The desire to expand internationally is a but a natural consequence of globalisation. While the regulatory framework in India has permitted Indian corporates of a specified nature to expand globally without any prior government approval and with limited conditionalities, Indian individuals are still restricted from entering global markets in their individual capacity as opposed to Indian corporates. This article seeks to examine the peculiarities of the regulatory framework for the investment by Indian resident individuals in joint ventures (JV) and wholly owned subsidiaries (WOS) abroad outside India.

Under Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulation, 2004 ("TIFS Regulations") no person resident in India can make a direct investment outside India except with the prior approval of the Reserve Bank of India ("RBI"). As far as companies and LLPs in India are concerned, Regulation 6 of the TIFS Regulations grants general permission for resident companies or LLPs to make investments in JVs and WOS abroad in accordance with the terms of the regulations.

In 2004 the RBI introduced a scheme as a liberalization measure to facilitate resident individuals to remit funds abroad for permitted purposes vide Circular No 64 dated February 4^th, 2004 read with GOI Notification G.S.R No.207(E) dated March 23, 2004. Vide Notification No. FEMA.263/RB-2013 dated March 5^th, 2013 the RBI issued the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2013 ("Amendment Regulations"). The Amendment Regulations inserted Regulation 20A which provided for the grant of permission for the investment by resident individuals into equity shares or compulsorily convertible preference shares of a JV or WOS abroad subject to the terms set out in Schedule V as incorporated by the Amendment Regulations.

A master direction has been issued by the RBI vide Circular RBI/FED/2017-18/3 FED Master Direction No. 7/2015-16 dated January 1^st, 2016 ("Liberalised Remittance Scheme" or "LRS") which consolidates all the provisions of the regulations of the RBI vis a vis the scheme. Another master direction of the RBI which is the Master Direction on Investments by Residents in JV and WOS abroad was also issued by the RBI issued vide circular RBI/FED/2015-16/10 FED Master Direction No. 15/2015-16 dated January 1^st, 2016 ("MDODI") on the subject matter. Under paragraph B20 of the MDODI, resident individuals are permitted to make investments in JV and WOS outside India in accordance with Schedule V of the Amendment Notification and subject to the ceiling prescribed under the liberalised remittance scheme.

Regulation 1 of the LRS permits remittances by resident Indian individuals of an amount up to USD 2,50,000 per financial year for any permitted current or capital account transaction or a combination of both without prior approval of the RBI. The financial year shall be calculated from April to March of the next year. All remittances exceeding such amount of USD 2,50,000 per financial year by resident Indian individuals would require the prior approval of the RBI.

Regulation 6(iv) of the LRS provides that remittances maybe made under the LRS by resident Indian individuals to make direct investment in joint ventures or wholly owned subsidiaries abroad subject to the provisions of the TIFS Regulations. Consequently, it is permissible for an Indian resident individual to remit an amount up to USD 2,50,000 per financial year for the purposes of investment into JV or WOS outside India.

The investment is however subject to the conditions set out in Schedule V of the TIFS Regulations¹. These include:

(i) resident individuals are prohibited from making direct investment in JV or WOS abroad which are engaged in the real estate business or banking business or in the business of financial services activity.

(ii) The JV or WOS abroad must be engaged in a bonafide business activity.

(iii) The JV or WOS, to be acquired / set up by a resident individual shall be an operating entity only and no step-down subsidiary is allowed to be acquired or set up by the JV or WOS.

(iv) The resident individual making the investment shall not be on the Reserve Bank's Exporters Caution List or List of defaulters to the banking system or under investigation by any investigation / enforcement agency or regulatory body.

(v) The resident individual is prohibited from making direct investment in a JV / WOS set up or acquired abroad individually or in association with other resident individual and / or with an Indian party located in the countries identified by the Financial Action Task Force (FATF) as "non co-operative countries and territories" as available on FATF website www.fatf-gafi.org or as notified by the RBI.

So far so good. The LRS appears to be fairly straightforward. However, there are a few regulatory sticky points from a commercial standpoint.

Firstly, any financial commitment by a resident individual to or on behalf of the JV or WOS, is prohibited. So in a scenario where an Indian resident promoter has set up a JV or WOS abroad wishes to extend any personal guarantee on behalf of the JV or WOS for the purposes of business, he will not be able to do so except with prior permission of the RBI. Secondly, should the JV or WOS expand and wish to acquire another step-down subsidiary in the investee country or set up a step-down subsidiary there, the JV or WOS will not be able to do so without the prior permission of the RBI.

Lastly and most critically the TIFS Regulations stipulate that in the event of disinvestment,

(i) Disinvestment by a resident individual shall be allowed after one year from the date of making first remittance for setting up or acquiring the JV or WOS abroad.

(ii) The disinvestment proceeds shall be repatriated to India immediately and in any case not later than 60 days from the date of disinvestment and the same may be reported to the designated bank.

(iii) No write off shall be allowed in case of disinvestments by the resident individuals.

Further, any alteration in shareholding pattern of the JV or WOS must be reported to the designated bank within 30 days of such alteration.

The provision under Schedule V for the immediate repatriation of proceeds into India of any disinvestment of the JV or WOS, hampers any further expansion plans that the JV or WOS may have as prior approval of the RBI would be required to re-invest any proceeds from the disinvestment in the investee country.

Conclusion: The LRS has admittedly been a favourable step towards liberalisation. However, it would need rethinking by the regulator of the points enumerated above in order for the LRS to truly achieve its objective of being an effective liberalisation measure keeping in minds the global expansion ambitions of Indian individuals.

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