ISSUE IV : Year-end policy glimpse


As the clock ticks into the new year with the hope and optimism that world over, nations will attain newer heights, greater glory and maneuver through multiple paths of success, we bring to your fore the highlights of the new policies that were implemented by the apex bank of India, the Reserve Bank of India (RBI) in the twilight of the year 2006. Keeping with the spirit of liberalization and with a view to provide impetus to India’s growing economy, RBI introduced several policies by way of circulars throughout the year.

Our current edition focuses on the regulations notified by RBI in the months of November and December and a preview to the expected policy changes in the new year.

1.0 RBI Circulars

Some of the changes recently introduced by RBI are given below under the specified heads:

1.1 Relaxation in current account transaction rules [A.P. (DIR Series) November 28, 2006]

Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 stipulated prior approval of RBI for drawing foreign exchange for the purpose of remittance to purchase trademark or franchise in India. Effective from November 28, 2006, the requirement of prior approval from the RBI has been removed.

1.2 Setting up of offices overseas [A. P. (DIR Series) December 4, 2006]

RBI has permitted Authorized Dealer (AD) banks to allow remittance up to 15% of the average annual  sales/income  or  turnover  during  the  last  two  financial  years  or  up  to  25%  of  the  net  worth, whichever is higher, for initial expenses of an Indian entity for the purpose of normal business operations of the branch or office or representative abroad. With respect to recurring expenses, RBI has allowed remittance up to 10% of the average annual sales/income or turnover during the last two financial years.

Further, RBI has allowed AD banks to permit remittances by a company incorporated in India, which has overseas offices, to acquire immovable property outside India for its business and for residential purpose of its staff, within the above mentioned limits for initial and recurring expenses.

1.3 Foreign investment in infrastructure companies in Securities Markets [A.P. (DIR Series) December 22, 2006]

RBI has allowed foreign investment in infrastructure companies in securities markets viz. stock exchanges, depositories and clearing corporations. However, it is subject to the following conditions:

  1. Investment with a maximum cap of 49% has been allowed in infrastructure companies with separate ceilings of 26% and 23% stipulated for Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) respectively.
  • Prior approval of Foreign Investment and Promotion Board (FIPB) is mandatory.
  • FII will be permitted only through purchases in the secondary market.

2.0 Projected changes

The Government of India is mulling over several new policies that might see the light of the day in the new year. Some of these proposed policies are as follows:

2.1 FDI in multi-brand retail segment

After having allowed 51% FDI in single brand retail, the Department of Industrial Policy and Promotion under the Commerce Ministry, Government of India, is currently in the process of finalizing policy for allowing 51% FDI in multi-brand items like consumer durables, sports goods, electronics, building equipment, and stationery. However, whether investment will be allowed through the automatic or the approval route i.e. with the approval of FIPB has not yet been decided. Moreover, the Government will not allow FDI in retailing brown1 and white2 goods since such a move could effect the small sectors in the unorganized sector.

2.2 Increase in FDI limit in private radio

The Government is considering an increase in the FDI cap in private FM radio from the existing limit of 20% to 49%. This would boost the FM radio private companies which are planning to tap the capital markets.

2.3 Periodic scrutiny of foreign companies investing in India

Foreign companies investing in India are liable to periodic review by the Government to ascertain if they pose a security threat to the country. Provisions to assess large investments are likely to be incorporated in the proposed FDI Promotion Act3. Further, local security authorities are expected to be given more powers to monitor and review projects entailing bulky investments in sensitive sectors like telecom.

2.4 Increase in FDI limit in airlines sub-sectors

In order to meet the funding requirements and the expansion plans of the domestic airlines, the Government of India is proposing to increase the FDI in non-scheduled airline operations, helicopter services, and regional airlines using small aircraft from the existing limit of 49% to 74%. However, in terms of the proposed policy change, a foreign airline company will not be allowed to have a direct or indirect stake in domestic carriers. Even foreign equity funds in which airline companies have a stake are barred from investing in domestic carriers.

1 Electrical equipment of a type used for leisure, e.g. radio, television, audio equipments, home computers, etc.
2 Large electrical home appliances (refrigerators or washing machines etc.) that are typically finished in white enamel.
3 The Act is still in the preliminary stage of discussion.

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