RBI Consults Top Banks On Easing Foreign Investment Norms

The Reserve Bank of India (RBI) is consulting with India’s top bankers to review the existing Overseas Direct Investment (ODI) norms. As per an Economic Times report, some senior central bank officials conducted a closed-door meeting with some of India’s top private and multinational corporate banks a fortnight ago. The primary agenda of the meeting was to clear the cloud around the ODI framework and ease some of the complex compliance hurdles.

The overseas investment framework in India is defined under the Foreign Exchange Management Act (FEMA) of 1999. The existing rules set conditions on how Indian companies and individuals can invest abroad, including compliance and reporting requirements.

What Are The Issues Raised By Banks?

During the meeting with officials of the Reserve Bank of India, banks raised several concerns about the existing Overseas Direct Investment (ODI) framework in India.

Investment Limits And Restrictions

At present, a domestic company can invest up to four times its total net worth or USD 1 billion (whichever is lower) as ODI to set up or acquire a foreign company. Banks said this creates bottlenecks for corporations planning to provide foreign financial services.

A local NBFC cannot invest beyond the permitted threshold if it intends to acquire an overseas NBFC. It is also not allowed to invest in businesses that do not deal with financial services.

NBFC Investment Rules

A partner at a domestic CA firm noted that the RBI recently proposed allowing unregistered Type-I NBFCs (with assets below ₹1,000 crore) to invest in overseas non-financial sectors. At the same time, it has insisted on RBI registration and approval for investments in foreign financial services entities.

He pointed out that this appears inconsistent, as the draft frequently asked question (FAQ) itself states that systemic risk concerns are not relevant for such NBFCs, and that appropriate safeguards could instead be applied to these investments.

Overseas Real Estate Investments

Banks also raised concerns about rules governing overseas real estate. At present, companies are not allowed to trade in foreign real estate markets. However, they are permitted to construct properties abroad and lease them out for passive income.

Banks questioned why investors are allowed to construct properties in a foreign country but not permitted to purchase ready-made properties or invest in service apartments.

Loans And Audit Requirements

Some banks suggested levying a minimum interest rate on loans given by residents to non-residents.

Another issue relates to the requirement to audit overseas companies acquired through ODI. Bankers said this can be onerous, particularly in cases where audits are not compulsory for small unlisted entities. In some cases, banks insist on foreign auditors, which increases costs.

Reinvestment And ESOP Restrictions

Participants also raised concerns about overseas equity investment rules. Investors who have remitted USD 250,000 to buy listed shares of a foreign company are not allowed to reinvest the proceeds from the sale of those shares into unlisted overseas investments.

In addition, an Indian resident employed by a foreign parent company is not allowed to buy shares of that company under an Employee Stock Options Plan (ESOP) scheme.

What Could Change If Norms Are Eased?

If the RBI decides to relax certain conditions, it could make overseas investments smoother for Indian firms. This may help companies expand globally, invest in foreign businesses, and explore new markets.

Industry experts say simplifying procedures could reduce delays and the compliance burden. It may also help startups and established companies diversify their operations beyond India.

Vihal Gada, founder and CEO of a tax services firm, said, "This is an excellent initiative, and RBI should take this opportunity to review certain procedural and contentious issues pertaining to OIs. An Indian resident investing a tiny amount in the equity of an unlisted foreign company is compelled to treat it as an ODI, which involves reporting formalities and submitting a valuation report to the bank. It's a practical challenge, especially when the investor can't access the complete financial information of the foreign company."

Sources:

The Economic Times

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