The Hindu Business Line : Investing abroad under the raised cap

Both capital account and current account transactions are allowed under the liberalised remittance scheme, which allows a range of investments abroad by a resident Indian — from buying foreign stocks to acquiring property and trading in stock/commodity futures overseas.

With various sectors opened to foreign investment and India the flavour of global investment season, there has been a steady accretion to the country's foreign exchange reserves. Forex reserves recently surged beyond the $200-billion mark, leaving the Reserve Bank of India with an "embarrassment of riches".

With a view to allowing Indians to invest or spend their money overseas, the RBI has been periodically bringing in amendments that liberalise the drawal limits for remittances by Indian residents. The latest in such relaxation came in the RBI's Annual Credit Policy of April 24, wherein the central bank raised the limit that resident Indian individuals can draw. The liberalised remittance scheme now allows resident Indians to draw up to $100,000, instead of the earlier $50,000 towards overseas investments and purchases.

But who can take advantage of the liberalised limits on overseas investments? What do the enhanced limits mean for investors and what are the options open to them?

Who is eligible

Only resident Indians are eligible for this scheme. By "resident" the reference is to any Indian passport-holder living in India. The person should not, by virtue of any action under the Foreign Exchange Management Act (FEMA), have declared himself/herself a non-resident.

The scheme is available only to individuals and not to Hindu Undivided Families, partnership firms, limited companies, trusts or other recognised legal entities. Also, investors need to note that some transactions are specifically disallowed and that this enhancement also brings into its fold certain transactions for which independent drawals were earlier available.

What is allowed

Both capital account and current account transactions are allowed under this scheme. The capital account transactions that can be made under this scheme range from buying stocks in overseas markets to acquiring property and trading in stock/commodity futures overseas. The scheme allows Indian residents to make the following capital account transactions:

Investment in foreign securities

Acquisition and transfer of immovable property outside India by an Indian resident

Maintenance of foreign currency accounts outside India

Taking out an insurance policy from a foreign insurance company on an Indian resident

Loans and overdrafts given to a person resident outside India, and

Sale and purchase of foreign exchange derivatives and commodity derivatives abroad

Though the overall limit for each person is $100,000, several individuals in a family can pool their limits to create a larger corpus for investments, provided they have individual sources of income.

A simple example is the case of an individual who wants to, say, buy property in, say, Dubai. Assuming he has the requisite Indian rupees and along with other members of the family decides to invest $300,000 in a flat in Dubai. If his family consists of three individuals, each with independent sources of income, each member can transfer to the development company in Dubai $100,000 each. With this $300,000, they can acquire the property in Dubai.

An individual may open a savings bank account in London and deposit $100,000 in it. At a later date, he may acquire equity shares in a UK-listed company, either through direct subscription to an initial public offer or through secondary market operations. This will constitute a capital transaction for purchase of securities.

Investment Window

The window available for the individual to exhaust his remittance limit is currently based on the financial year. The first financial year window is from April 1, 2007 to March 31, 2008. This means that one can draw up to $100,000 for overseas remittances in the current financial year and every financial year thereafter. Though the limit of $100,000 has been set for this year, the possibility of this being revisited and increased subsequently is very high, given the sustained flow of forex into the country.

The current limit of $100,000 in a financial year is for both capital and current account transactions effected by an individual. A person can exhaust this limit in a single drawal or do so in multiple drawals, within the overall limit of $100,000. The scheme is silent on the holding period of the assets acquired and, hence, this can be interpreted to mean it is for perpetuity, till any change is made to this.

Apart from transactions mentioned above, which involve acquiring assets or property abroad, the scheme also allows certain current account transactions (see definition) within this $100,000 limit. For instance, gifts and donations in forex. This apart, net dividend income from foreign investments, interest income receivable on deposits, debentures, bonds, and rental income receivable from properties acquired in a foreign country would also fall within the ambit of current account transactions.

It must be noted that some sections in the FEMA cover drawal of foreign exchange for certain purposes such as medical treatment, education expenses, travel and business transactions. These have separate limits and need not be aggregated with the $100,000 limit mentioned here.

In the light of the liberalised limits on remittances, resident individuals have been given permission to open, maintain and hold foreign currency accounts with a bank outside India and to remit therein $100,000 per financial year.

How one draws funds

The individual should, in the first place, have a sufficient bank balance in Indian rupees in his or her local bank account. The drawal of foreign exchange will be effected from this account and the transfer made abroad. Opening of an account in a foreign country and transferring the same in itself would mean an accretion to the assets of the individual and this will be a capital account transaction.

An application to the authorised dealer will have to be made by the individual stating the purpose for which the drawal is being made. This purpose will have to be in line with the capital or current account transactions allowed by RBI. The transaction also requires a declaration from the individual that, with the specific drawal for which permission is being sought, the limit of $100,000 has not been breached.

The scheme opens up a range of investment options for Indian residents who have children abroad, as they can purchase property and other assets at places where their children are resident. If the individual does not want the assets to pass on to the children before his lifetime, he can have the assets in his name.

However, investors may also have to keep the following factors in mind before availing of these benefits:

The individual will have to declare the income earned from such investments in his income-tax returns.

He may also have to file a tax return in the country where the assets are held, if the local laws so require. He will be eligible for any tax benefits if there is a Double Tax Avoidance Agreement with that country.

The choice of assets and the country where they are acquired are key factors in deciding to capitalise on this scheme.

The individual will also be exposed to exchange rate fluctuations between the rupee and the currency of the country where the asset is acquired. Note that the value of one US$, which was hovering at Rs 49 levels in the latter half of 2002, has depreciated to about Rs 41.25 in recent times.

Glossary

Drawal: The cap on overseas remittances by investors, defined in terms of "drawal" limit for each individual. The term "drawal" means withdrawing money from an authorised person (bank) for the purpose of adding to a foreign asset or making payment towards a current account transaction.

It also includes the opening of an LC (letter of credit) by an authorised dealer on behalf of a resident individual in favour of a foreign entity for acquiring any asset or for a transaction, be it capital or current.

Using an international credit card, international debit card or an ATM card would also amount to drawal, if it results in a capital or a current account transaction and creates a liability to pay in forex.

Capital Account Transaction: This is a transaction that alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6.

Current account transaction: A transaction other than a capital account transaction is called a current account transaction.

(The author is a chartered accountant and Partner at Karra & Company. Feedback can be sent to prem@karra.in)

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