The Reserve Bank of India (RBI) has announced a significant liberalisation of its foreign investment regime, allowing overseas individuals to invest directly in equity instruments of listed Indian firms. This move, announced on Monday, aims to broaden the investor base for domestic equities at a time when foreign portfolio investors are withdrawing funds, adding pressure on the rupee.
The RBI's decision permits 'persons resident outside India' (PROIs) to invest through portfolio investment schemes, which were previously available only to non-resident Indians and overseas citizens of India. This change follows the government's recent notification of relaxed rules under the Foreign Exchange Management Act (FEMA), facilitating investments in listed Indian stocks by foreign individuals and entities.
To support this initiative, the RBI has allowed all commercial banks to open repatriable rupee accounts for individuals outside India. However, the implementation faces challenges, particularly regarding stringent know-your-customer (KYC) checks and client onboarding requirements compliant with FEMA. Harshal Bhuta, a partner at law firm PR Bhuta & Co, highlighted the complexities involved in opening Indian rupee bank accounts for foreign citizens.
“If foreign citizens want to invest through an Indian rupee bank account, it is not as easy to open one.”
Harshal Bhuta, partner at law firm PR Bhuta & Co
The RBI has also stipulated that any breach of investment limits will result in a reclassification from foreign portfolio investment to foreign direct investment (FDI). This regulatory adjustment is part of broader efforts to boost foreign currency inflows, stabilize the rupee, and ease external funding constraints. Last week, the RBI introduced measures to mobilize foreign currency non-resident deposits and offered a fixed-rate swap facility for external commercial borrowings by public sector units.
Additionally, the RBI amended rules on Friday concerning how overseas investors can pay for and repatriate proceeds from non-debt investments, aiming to streamline procedures and clarify reporting requirements under the foreign exchange framework.
Background
The recent liberalisation measures are part of a broader strategy to attract foreign investment and stabilize India's financial markets. With foreign exchange reserves having dipped to $681 billion from a high of $728 billion in February, the RBI's initiatives are crucial in maintaining economic stability.
Looking ahead, the success of these measures will depend on their operationalization and the ability of banks to effectively implement the new guidelines. Market participants will closely monitor the impact on foreign currency inflows and the rupee's performance in the coming months.
