RBI may hike overseas direct investment limit for Indian firms & individuals

NEW DELHI: With the country���s foreign exchange reserves hovering over the $300 billion-mark, the Reserve Bank of India is likely to enhance the overseas direct investment limit for Indian companies and individuals to 250% of their net worth.

The current ceiling on overseas investment of Indian companies and individuals is 200% of their net worth. Enhancing the limit would enable Indian companies to go in for larger acquisitions abroad.

Recommendations to this effect have been placed before RBI by a panel comprising top officials of the apex bank and the government.

RBI is looking at withdrawal of the facility to invest GDR/ADR proceeds abroad without any limit, but no decision has been taken yet. Funds parked in exchange earners foreign currency (EEFC) accounts could also be brought under the overall ceiling, in case the proposal is approved.

This means the net worth-linked ceiling would apply in the case of GDR/ADR/EEFC funds if the apex bank accepts the panel���s recommendations.

The special committee of the overseas investment division at RBI���s forex department has considered several issues related to overseas investment recently. There was a proposal to withdraw the facility to use the unutilised portion of net worth for direct investments abroad by subsidiaries and holding companies.

The panel decided to retain this facility as it gives India Inc a lot of flexibility while investing abroad. Transferring the unutilised entitlement to a sister concern or subsidiary or a group company enables companies to tap the full potential of their investment capability, the committee felt.

Implementation of the recommendation to enhance the overseas investment limit has been left to RBI, the sources said. The apex bank is expected to raise the bar at an ���appropriate��� time, keeping ���macroeconomic��� conditions in view. As the forex level is at an all-time high, an adequate cushion is now available to hike the outgo limit.

Moreover, the recent cut in US interest rates may lead to higher dollar inflows as Indian markets offer high returns for debt as well as equity.

The committee also looked at the need to make the track record and domain knowledge criteria for clearing overseas investment proposals. It was decided that applying such factors might hamper the opportunities available to India Inc. ���The proposal was not recommended as start-ups and first-generation entrepreneurs would face obstacles,��� the sources said. The safeguards followed by banks through know-your-customer norms would take care of such cases, the committee concluded.

Allowing companies to invest more abroad would ease the pressure on RBI in terms of managing forex flows, withdrawal of the flexibilities to use ADR/GDR/EEFC funds beyond eligibility limits would mean keeping close tabs on overall investments abroad.

The issue to bring ADR/GDR/EEFC funds into the overall limit would be reconsidered later, the sources said. Overseas direct investment rose to $12,548 million in 2006-07 as compared to $4,864 million in 2005-06. The outgo on account of such investments during April-September 2007 was $6,510 million.