BOMBAY, 13 January 2003 — The New Year has indeed been ushered in with a big bang. The Indian government has presented a wonderful New Year gift.
The Finance Minister Jaswant Singh announced major relaxations in capital controls at the Pravasi Bharatiya Divas function, indicating a big leap toward full convertibility of the rupee. And the first step was taken in this direction by allowing individuals, companies and mutual funds to make equity investments in listed foreign companies. But this carrot has a stick at its end.
Indian residents — individuals, corporates and mutual funds — can invest in the equity of companies listed on recognized overseas stock exchanges, provided these companies have at least 10 percent shareholding in a company listed on an Indian exchange. So this means, Sun, Microsoft, McDonald’s are still out of reach. Indian individuals can now make unlimited investments in shares of foreign companies while domestic corporates can invest up to 25 percent of their net worth in listed foreign companies.
For mutual funds, the government has doubled the overall foreign investment cap to $1 billion. Indian mutual funds had only now started looking at overseas investments. While the limit stands at $500 million now, barely Rs.500 million has been invested by Indian mutual funds abroad. And it is expected that most of the funds will take a cautious approach in investing abroad.
Also, Indian companies with overseas branches will now be allowed to buy property for business and staff accommodation, or setting up warehouses abroad. The government has also done away with limits on advances by export earners foreign currency account-holders and scrapped the $20,000 limit for remittances under employee stock option plans. This will be of particular interest to software companies.
The government also made some relaxations in the American Depository Receipt (ADR), Global Depository Receipt (GDR) proceeds. Till now, companies had to bring their ADR and GDR proceeds to India within a specific period. And now the government has allowed within a granted general permission to Indian companies to retain their ADR and GDR proceeds abroad for future forex requirements. With regard to transfer of assets in India, remittance of proceeds up to $1 million has also been permitted.
An important policy decision announced during the Pravasi Bharatiya Divas was granting dual citizenship to some Indians who have acquired foreign citizenship, apart from facilities like the issue of identity cards for persons of Indian origin.
According Jaswant Singh, this is only a “starter” on reforms, and within a month the center will come up with major measures to boost infrastructure, especially ports, airports and airlines, apart from the ongoing highway projects. Measures are also being taken to promote mobilization of funds by issue of Indian Depository Receipts (IDR) by foreign firms, which will help non-resident Indians NRIs to raise funds in India against securities of foreign companies. He also said that a positive policy environment will be created to make the country a global manufacturing hub within the next five to seven years, apart from measures to boost its position in the knowledge-based industry.
India is currently sitting on a big pile of foreign exchange reserves. Fresh inflows, export remittances and revaluation of the euro vis-a-vis the US dollar have further pushed up India’s foreign exchange reserves closer to the $71 billion mark. But experts feel the appreciating rupee and comparatively lower equity returns and interest rates abroad will keep overseas investments by Indians to a trickle.
Most analysts opine that there will be no frenzy in investments abroad immediately as right now the Indian market is more attractive. The current state of rupee holding firm against dollar could be another deterrent for such investments. But there is no doubt these measures will empower India Inc. to globalize its operations and it may also facilitate acquisition of manufacturing units and service companies abroad.