ISSUE II : Policy updates & insights


An economy is driven by well-structured policies and ideas which require modifications in order to be conducive with the prevailing economic conditions. The Reserve Bank of India (RBI), India’s federal bank, is largely responsible for shaping the economic policies and, consequently, issues circulars and notifications periodically.

Our latest bulletin seeks to provide updates on the circulars that have been issued recently. These circulars have been selected keeping in mind topics pertinent for the foreign investors who have existing or anticipated business interest in the Indian economy. Apart from the latest circulars, it also gives an insight into the proposed policy changes in various sectors.

1. RBI circulars

The relevant circulars issued by RBI after July 1, 2006 have been summarized below:

1.1 Investment by Mutual Funds (MFs) in overseas securities [A.P. (DIR Series) Circular No.3 dated July 26, 2006]

The aggregate ceiling for overseas investment by MFs, which are registered with the Securities and Exchange Board of India (SEBI), has been increased from US $ 1 billion to US $ 2 billion. An increase in the ceiling will result in enhanced interest and greater participation by MFs in undertaking investments abroad. Further, a limited number of qualified MFs have been allowed to invest cumulatively up to US $ 1 billion in overseas exchange traded funds (as permitted by SEBI).

MFs registered with SEBI, are allowed to invest in ADRs/GDRs of Indian companies, rated debt instruments as well as in the equity of listed overseas companies. To enable them to tap a larger investible stock overseas, the requirement of 10% reciprocal shareholding in the listed Indian companies by such overseas companies has been removed.

1.2 Maintenance of collateral by Foreign Institutional Investors (FIIs) for transactions in derivative segment [A.P. (DIR Series) Circular No. 4 dated July 28, 2006] 1

This circular permits FIIs to offer foreign securities with AAA rating as collateral to the recognized stock exchanges in India for their transactions in the derivatives segment. The collateral will serve as a security for the stock exchanges that will be dealing with FIIs. Thereafter, the stock exchange in India can approach RBI for specific approvals required under the Foreign Exchange Management Act, 1999 (FEMA).

1.3 Clarification regarding the mode of payment for purchase of immovable property in India by Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) [A.P. (DIR Series) Circular No. 5 dated August 16, 2006]2

As per the existing regulations, NRIs and PIOs can acquire immovable property in India excluding agricultural property, plantation, or a farm house. The current circular clarifies the mode of payment for acquisition of immovable property in India. The payment of purchase price can be made by means of funds through overseas inward remittances or money held in any non-resident account. Other modes including payment by traveler’s cheque or foreign currency notes are prohibited.

1.4 Overseas direct investment by regulated entities in the financial sector [A.P. (DIR Series) Circular No. 6 dated September 6, 2006]

Presently, entities engaged in financial service activities in India who are investing in non-financial service activities abroad are not required to comply with the conditions stipulated in regulation 73 of Foreign Exchange Management (Transfer of issue of any foreign security) Regulations, 2004 relating to profit margins and regulatory approvals, for venturing into such financial sector activities.

However, this circular alters and notifies that the regulated entities in the Indian financial sector who are investing overseas in non-financial service activities must comply with the conditions stipulated in regulation 7 of the notification. Unregulated Indian entities engaged in the financial service activities in India can invest in non-financial sector activities abroad in accordance with Regulation 64 of the FEMA notification.

Further, the circular provides that trading in commodities exchanges and setting up JV/WOS for trading in overseas commodities exchanges will also be considered as a financial service activity and will require clearance from the Forward Markets Commission (FMC)5 Indian entities who want to set up JV/WOS abroad for trading in overseas commodities exchanges have to approach the FMC for regulatory clearance.

2. Proposed policy changes

In addition to the above implemented policies, there are certain changes that are being currently contemplated. A synopsis of the proposed amendments is covered below.

2.1 Increase in the External Commercial Borrowings (ECB) cap

In order to keep pace with the corporate India’s zest for foreign loans, the government is planning to widen the ECB window. The ECB route provides an option to look for relatively lower interest rates abroad. According to the external debt status report6, the annual cap of ECB was set at US $ 15 billion last fiscal year yet over US $ 17 billion was raised through the route. Excessive borrowing over and above the prescribed limit has an impact on the liquidity in the economy and also affects the interest rates. To avoid a similar situation this fiscal, RBI and the government are contemplating an increase in the ECB limit.

An increase in the ECB limit would mean a revision of the aggregate cap of US $ 18 billion set on all such loans in the current fiscal year ending March 2007. According to the government, the demand for ECBs will further accelerate in the second half of the year. This will be largely due to an increased growth in the industrial sector and the special economic zones which are also allowed to raise ECBs for their own requirement. Consequently, in anticipation of rising demands, the RBI and the government feel a need to raise the existing cap.

2.2. Foreign Direct Investment (FDI) in education sector

The government is considering plans to allow FDI in the education sector. The commerce ministry proposes to circulate a discussion paper on liberalizing higher education and changing domestic regulations to attract investment in the sector. The paper will provide inputs for the proposed foreign education institution bill. The commerce department wants foreign educational institutions to be given the freedom to determine salaries of their faculty and to fix fees outside the purview of the University Grants Commission. It has also proposed that the universities interested to enter India must have a corpus of US $ 100 million and get a “No-Objection Certificate” from the Embassy or High Commission of their home countries in India. Many foreign universities are keen to set-up colleges in India. The proposal is still in the nascent stage. If the policy is introduced, higher education in India may acquire a different dimension.

2.3 Satellite radio policy

The government is in the process of reviewing the satellite radio policy wherein the FDI cap is projected to be lowered from 100% to 49%. The policy may possibly specify that no entry fee should be imposed on the existing and the new players. However, based on current discussions, it envisages levy of an annual license fee of 4% of gross revenues from India. The license is expected to be issued for a period of 10 years and provides an automatic extension of 5 years. The policy may also encourage up-linking of satellite radio stations from India but this will not be made mandatory. The Ministry of Information and Broadcasting will announce the policy in consultation with the other relevant ministries.

2.4 Reduction of FDI cap in the courier sector

The government is contemplating lowering the FDI limit in the courier and express sector to 49% from 100%. The main reason for this reverse move is to revive the postal sector which has been facing a stiff competition from the courier industry in India. The proposed change is a part of the other radical steps that have been proposed in the industry such as restriction on carrying letters below 300 grams7 and imposition of a universal service obligation levy. By adopting these strategies, the government is trying to improve the fortunes of the postal sector and provide the much needed fillip to the archaic postal laws in India.

The government is planning to implement the proposal by mandating all courier and express industry players to pay a one-time registration fee. The Department of Posts has endorsed the change. However, clearance from the Ministry of Law and Justice is awaited.

2.5 Relaxation in real estate FDI rules

The government is considering simplifying the entry of foreign investors in the real estate sector by reducing the minimum area criteria to 10,000 sq meters for commercial developments and 10 acres for residential projects. Presently, FDI is not permitted in commercial establishments under 50,000 sq meters and housing ventures below 10 hectares. At the same time, the government is also planning to introduce regulations which will ensure that there are no real estate speculations by foreign investors.

1Foreign Exchange Management (Transfer of issue of any foreign security) Regulations, 2004 and Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations 2000.
2 Amendments made in Regulation 3 and 4 of Notification no. FEMA 21/RB-2000 FEMA (Acquisition and Transfer of Immovable Property in India) dated May 3, 2000.
3 According to Regulation 7 of notification no. FEMA 120 dated July 7, 2004, an Indian party which intends to invest in an entity engaged in financial service activities abroad has to fulfill certain requirements. The proposed investor must have earned profit in the preceding three financial years from the financial service activities; it should be registered with the Indian regulatory authority and it must have obtained approval from the concerned regulatory authorities in India and abroad for venturing into such financial sector activities. Further, any additional investment by an existing Joint Venture (JV) or Wholly-Owned Subsidiary (WOS) in the financial service sector can be made only after complying with the requirements stipulated above.
4 This regulation deals with direct investment in a JV/WOS abroad.
5 It is a regulatory authority which has been established under the Forwards Contracts (Regulation) Act, 1952 and is supervised by the Ministry of Consumer Affairs and Public Distribution. Its functions include observing the workings of forward markets and recommending changes for improvement. It is required to undertake inspection of accounts/documents of recognized institutions and organizations. Further, it is responsible for advising the central government with respect to recognition or withdrawal of recognition from any association and finally, to collect and publish information regarding the trading conditions of certain goods.
6 Released by the Ministry of Finance, Government of India.
7 The government is planning to give exclusive rights to the postal sector to carry letters weighing less than 300 grams.


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