Is the LRS a Good Option for Overseas Portfolio Investments?

This article aims to explain (a) why Indians send money abroad for specific purposes, (b) how they can invest the remaining funds, and (c) recent FEMA changes leading to notices for many individuals to bring back unused funds from accounts overseas.

 

Individual remittances are a dynamic and integral aspect of the globalized world. While they empower individuals to support their families and pursue opportunities abroad, they also necessitate a vigilant regulatory framework to ensure compliance and prevent misuse. Indian resident individuals who are looking to remit funds outside India can do so in accordance with the guidelines and the regulations as prescribed in the Foreign Exchange Management Act, 1999 and regulations made thereunder (FEMA). Many high net-worth individuals, or HNI’s, remit funds outside India for maintenance of close family, medical expenses, business travels, education, etc.

FEMA deals with current and capital account transactions and has an explicit list of remittances for resident Indian individuals. Remittances outside India for any capital/current account transactions can be made only for permitted transactions under the FEMA. Any other remittance which is outside the scope of FEMA would require a prior approval of Central Government/Reserve Bank of India (RBI).

As a part of current account transactions rules, resident individuals are permitted to remit funds outside India under Schedule III - Liberalised Remittance Scheme or LRS.

Schedule III – LRS

LRS is applicable only to resident individuals. It allows the resident individuals to remit the funds up to a limit of USD 2,50,000 per financial year for specified current account transactions. LRS is not available to corporates, partnership firms, HUF, Trusts, etc. Remittance is permitted for following transactions abroad.

i.            Private visits to any country (except Nepal and Bhutan)

ii.            Gift or donation

iii.            Going abroad for employment

iv.            Emigration

v.            Maintenance of close relatives abroad

vi.            Travel for business, or attending a conference or specialised training or for meeting expenses

vii.            Expenses in connection with medical treatment abroad

viii.            Studies abroad

ix.            Any other current account transaction

Remittance may exceed the prescribed limit for purposes listed in (iv), (vii) & (viii), subject to RBI approval.

Repatriation of funds back to India within 180 days under the LRS Scheme

Previously, a resident individual who has remitted funds under the LRS and not used it for the purpose as per Schedule III was not required to remit back the same to India until the purpose of the remittance was met. This included any short-term income generated on such unspent funds abroad as the money was kept idle in the bank account or invested in the modes of investment specified under FEMA outside India.

RBI has now made mandatory for an resident individuals to repatriate the unused/unspent funds back to India within a period of 180 days irrespective of whether the funds have been utilised for remittances purpose.

Apparently, RBI is not permitting any individual resident to keep their funds parked in any banks abroad and the same should be repatriated to India if such remittance was made on account of LRS and remains unutilised for the prescribed purpose thereof.

This amendment has caused some ambiguity for resident individuals.

 

 

 

 

 

 

How resident Individuals can invest their unused/unspent funds parked in overseas account?

Generally, the money which is used to remit the funds would be kept idle in the account or the money may have been partially utilised. Such unused/unspent money would have been invested in different modes in the foreign country. FEMA has mentioned certain modes wherein investment can be made outside India. Such investments can be made using Overseas Direct Investment (ODI) by Indian corporates and Overseas Portfolio Investment (OPI) by Indian individuals.

ODI means (a) Investment by way of acquisition of a foreign entity; (b) Subscription as a part of Memorandum of Association; or (c) Investment in 10% or more of listed equity capital or investment with control where investment is less than 10% of listed equity capital.

OPI means investment, other than ODI, in foreign securities, excluding any unlisted debt instruments, or any security issued by a person resident in India who is not in an IFSC. OPI by a resident individual in the equity capital of a listed entity, even after its delisting shall continue to be treated as OPI until any further investment is made in the entity.

There is still an ambiguity amongst resident individuals whether such unused/unspent funds overseas can be invested in other avenues such as short-term fixed deposits with foreign banks.

Notices received by resident individuals to close their overseas account

Foreign banks generally have a different monetary limit for HNI’s to keep their account functioning with allied banking facilities. Therefore, HNI’s are obligated to maintain a minimum required balance in order to be able to enjoy the perks offered by such banks.

Such minimum balance may even range up to $1 million in case of HNI accounts abroad. For lesser balance, the banks are also asking the customers to use their wealth management arm to invest in stocks and debt instruments. Permissibility or otherwise of such investments to be made by the HNI’s is met with silence from RBI and till date no FAQs have been released to clarify the same.

With the introduction of recent amendments brought into by the RBI i.e., to repatriate the funds from the overseas account, many offshore banking units serving to HNI’s have started sending notices to either close their accounts or invest in the debt instruments. If HNI’s do not repatriate the funds back to India, then such HNI’s may potentially be violating the RBI norms. Further, investment in overseas fixed deposits or unlisted debt securities is also not completely clear under FEMA.

The motivation behind sending such notices to HNI’s, could be manifold. It could be to encourage Indian HNI customers to withdraw beforehand and save from potential violation of FEMA regulations. Alternatively, offshore banks could be indicating that they may not want to bear the cost of maintaining accounts with relatively low balances.

             

Way forward

Indian corporates are able to invest overseas through ODI route. The RBI had introduced OPI regulations in 2022 with the aim to facilitate even resident individuals to invest outside India at par with corporates subject to the ceiling of LRS.

Accordingly, it would only be in sequence for RBI to clarify if OPI would include investment in foreign fixed deposits and unlisted securities. Apparently, there seems to be no reason to ignore these avenues when OPI permits non-debt investments which are way more volatile in nature.