RECENT CHANGES TO INDIA’S FOREIGN EXCHANGE REGULATIONS

This update discusses certain key changes to India’s foreign exchange regulations implemented in the past few weeks

Liberalization of the limit under the Liberalized Remittance Scheme (“LRS”)

In the bi-monthly monetary policy statement released on February 3, 2015, the Reserve Bank of India (the “RBI”) has increased the limit on remittance of foreign exchange for current and capital account transactions by an individual resident in India to a whopping US$250,000 (United States Dollars Two Hundred and Fifty Thousand) per financial year per person from US$125,000 (United States Dollars One Hundred and Twenty-five Thousand).  Further, foreign exchange withdrawals permitted with prior RBI approval for transactions listed under Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (the “FEMA CA Rules”) (i.e., certain credit card purchases) have also been subsumed under the increased LRS limit, and such transactions do not now require prior RBI approval.

The increase in the LRS limit reflects the growing stability in India’s foreign exchange reserves and makes overseas investments in securities and immovable property easier for resident Indians.  In addition, resident Indians undertaking transactions listed in Schedule III of the FEMA CA Rules can now take the benefit of the extended limit of US$250,000 (United States Dollars Two Hundred and Fifty Thousand) without having to approach the RBI for its approval.

Foreign investment in the medical devices sector

On January 6, 2015, the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India, notified a press note permitting 100% foreign investment in companies manufacturing medical devices under the automatic route (i.e., without the permission of the Foreign Investment Promotion Board) and clarifying that the conditions applicable to foreign investment in the pharmaceuticals sector would not be applicable to the medical devices sector.  The RBI has also formalized this press note by issuing a circular on February 2, 2015.

Under Indian drugs regulatory statutes, certain medical devices were classified as “drugs” and all standards applicable to manufacture, import, sale, etc. of drugs were also made applicable to such medical devices.  Further, as there was no specific policy under India’s foreign exchange regulations, it was viewed that the restrictions imposed under the foreign exchange regulations on the pharmaceuticals sector also applied to the medical devices sector.

This change is significant for the Indian healthcare industry as it relies heavily on imported medical devices.  With this liberalization, the medical devices industry in India is expected to see more capital investment and growth.

Reporting under the e-Biz platform – Foreign Direct Investment

On February 12, 2015, the RBI issued a circular notifying that the advance reporting form (“ARF”) and Form FC-GPR can be filed online on the e-Biz platform of the Government of India.  The ARF is used by Indian companies to report inflow of foreign direct investment and the Form FC-GPR is used to notify issue of securities by an Indian company to a person resident outside India.  This facility will be available from February 19, 2015 onwards.  Companies can continue to file the forms manually also.

This initiative is significant step towards making foreign exchange related filings simpler and efficient.

Changes in the Foreign Portfolio Investment Regime

The RBI and the Securities and Exchange Board of India (the “SEBI”) have recently notified two (2) changes in regulations relating to investments by foreign portfolio investors (“FPI”) following the bi-monthly monetary policy statement released on February 3, 2015.

Under the current regulations applicable to foreign portfolio investments, FPIs are permitted to invest in government securities.  The RBI and the SEBI have now permitted FPIs to invest in government securities from the coupon interest received by FPIs from their existing investments in government securities.  Also, such additional investments will not be considered in calculating the applicable limit for FPI investments in government securities, which currently stands at US$30,000,000,000 (United States Dollars Thirty Billion).  Such investments will be required to be made within five (5) working days from the date of receipt of the coupon interest.  This change is aimed at increasing inflow of monies from outside India.

Secondly, the RBI and the SEBI have notified that all future investments by FPIs in corporate bonds will have to be made in corporate bonds having a minimum maturity of three (3) years. Further, all future investments against the limits vacated (when the current investments end either through sale or redemption) shall have to be made in corporate bonds with a minimum residual maturity of three (3) years.  However, there is no lock-in period and FPIs are free to sell the securities to domestic investors.  Lastly, FPIs will no longer be permitted to make any further investments in liquid and money market mutual fund schemes.  This move indicates that the RBI is looking to attract long term investors.