RBI Clarification on Overseas Investment Norms

In a previous
post
, Satyajit had discussed the Reserve Bank of India’s (RBI) policy
measures announced on August 14, 2013 to restrict overseas direct investments
(ODI). Primarily, it was decided to reduce the ODI limits of a company from
400% of its net worth to 100%.
Yesterday, the RBI announced some clarifications
that mitigate the severity of the above restrictions. First, it clarified that the restrictions would apply only
prospectively. Hence, all financial commitments made on or before August 14,
2013 would be preserved and the erstwhile 400% limit would apply to them. Second, the higher limit of 400% will be
retained for ODI through external commercial borrowings (ECB). Third, it has been clarified that the
limit of financial commitments will not be applicable to funding out of the
EEFC account of the Indian company or out of funds raised by way of depository
receipts (ADRs/GDRs). Several other clarifications have been issued by the RBI
in response to queries raised by the parties.
In addition, the RBI has also eased
the end-use restriction for ECB from foreign equity holders in the borrower
companies. Hence, ECB can be availed in such circumstances even for general
corporate purposes so long as specified conditions are satisfied.

These suggest that
the RBI is keen to maintain a balance between controlling the foreign exchange
flows, but at the same time in permitting normal business and financing
activity. RBI’s
press
release
accompanying these changes expressly articulates that such measures
were necessary in view of the current macro-economic situation. However, it
appears that the intention is for RBI to allow bona fide and genuine ODI
transactions.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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