RBI hikes foreign investment caps to $200,000

MUMBAI: Indian policy makers have put into fast forward mode the transition plan to move towards capital account convertibility, a move prompted by the surge in capital flows.

ET had reported on Tuesday that RBI is pushing for higher fund outflows. Local corporates who are expanding their global footprint will now have greater freedom to invest in their foreign ventures and subsidiaries while mutual funds can park a part of their corpus in stocks of globally-listed firms and in other products.

Individuals will also be in a position to take advantage of the new window that has been opened up. The annual individual ceiling for local citizens to remit money overseas has been hiked from $100,000 to $200,000, offering opportunity to invest in stocks of global blue-chip firms, invest in property or spend more while travelling abroad.

The new outward foreign investment norms unveiled on Tuesday appear to be a desperate tilt at encouraging more outflows at a time when inflows are at a record high from all sources: portfolio flows, foreign direct investment and private equity. Opening up the window is one of the few policy options the Reserve Bank of India and the government are left with considering that placing fetters on portfolio flows on private equity is far more sensitive.

According to the new norms, a domestic firm can invest up to 400% of its net worth, from the current norms of 300%, in overseas JVs and wholly-owned subsidiaries under the automatic route. The limit for portfolio investments abroad has also been enhanced for listed Indian companies to 50% of their net worth from 35%.

Further, the requirement of 10% reciprocal shareholding in listed Indian companies by overseas companies for portfolio investment outside India by domestic listed companies has been dispensed with.

RBI has also raised the ceiling for pre-payment by domestic companies to $500 million from $400 million without the need for firms to obtain the approval of the central bank. It has also increased the ceiling for overseas investments by mutual funds, from $4 billion to $5 billion.

Individual remittance has been doubled to $200,000 per financial year from $100,000 that makes it possible for a family of four (adults) to remit $800,000 annually, which works out to well over Rs 1 crore. Buying property in a decent location in some east Asian countries or in interior Europe could be possible now, as also the prospects of building a portfolio of global blue-chip shares.

However, bankers reckon the major impact could be from the increase in overseas investments by Indian corporates. This comes at a time when acquisitions by Indian corporates are at all-time high. Compared to $4.4 billion of overseas acquisitions in 2005, the figure was $24.46 billion in 2006, and it has already topped $21 billion this year.

According to StanChart MD (global corporate sales, south Asia) Hemant Mishr, “RBI actions are in line with the Tarapore Committee recommendations. Given the demand supply mismatch, it suits the central bank in its conduct of exchange rate and monetary policy. The liberalisation of overseas acquisitions is a particularly welcome step and will remove procedural bottlenecks in the overseas aspirations of Indian corporates.”