RBI relaxes capital account norms

RBI relaxes capital account norms
ENS ECONOMIC BUREAU

MUMBAI, MAR 2: After Thursday’s bank rate cut, the Reserve Bank of India (RBI) on Friday further liberalised capital account controls. Following up with the Union Budget announced on Wednesday, the central bank issued guidelines to liberalise capital account in respect of acquisitions of companies and shares abroad, investment of ADR/GDR proceeds and two-way fungibility and raised the FII limit.

The limit on annual basis of investment has been raised up to $50 million by Indian companies planning to make acquisitions of foreign units or direct investment abroad in joint ventures/wholly owned subsidiaries on an annual basis through automatic route without being subject to the three year profitability condition.

The RBI said there was a limit which was in a block of three years which would now be available annually without any profitability condition. Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR issues as against the earlier ceiling of 50% for acquisitions of foreign companies and direct investments in joint ventures and wholly-owned subsidiaries.

A new facility has been set up for additional block allocation of foreign exchange to companies with proven track record, which have exhausted the limit of $50 million available under the automatic route for investment or acquisition overseas. Such block allocation would be sanctioned in advance enabling Indian companies to negotiate and finalise their acquisitions or direct investments without having to secure RBI permisssion, subject to post-facto reporting to the apex bank, the statement said. While providing such allocation, RBI would also specify the means of financing as well as the time period over which such permission would be valid, the statement said. However, RBI would consider the financial position and business track record of the Indian company, prima facie viability of investments and justification for additional requirement of foreign exchange and its contribution to the external trade and other potential benefits arising out of the investment.

Any Indian company which has issued ADRs/GDRs may acquire shares of foreign companies engaged in the same area of core activity upto $100 million or an amount equivalent to ten times of their exports in a year, whichever is higher. Earlier, this facility was available only to Indian companies in certain sectors. FIIs can invest in a company under the portfolio investment route upto 24 per cent of the paid-up capital of the company. It can be increased to 40% with approval of general body of the shareholders by a special resolution.

This limit has now been increased to 49% from the present 40%. The two way fungibility in ADR/GDR issues of Indian companies has been introduced subject to sectoral caps whereever applicable. Stock brokers in India can now purchase shares and deposit these with the Indian custodian for issue of adrs/gdrs by the overseas depository to the extent of the ADRs/GDRs that have been converted into underlying shares.