From India with Love: how the Reserve Bank of India is giving freedom to investors

This article is intended to be a short update as a first-hand witness in India scrutinising the various views of investment here.

As I write from the Pai family home in the centre of Mumbai, I notice just how much inflation has affected the retail market, which I like to observe so closely (having bought great-quality sandals for a whopping £4.90!) Considering this shocking inflation, the new Reserve Bank of India (RBI) Governor Raghuram Rajan has announced a variety of measures to strengthen the rupee; to do this the RBI has liberalised investment procedure for foreign investors holding sizeable stakes in Indian companies to further increase their stakes in the same company – and they won’t need the RBI’s approval.

The new approach aims to increase foreign influx into India and reduce the bureaucracy that can pose a hindrance to foreign investors making investments in Indian stocks. In addition there is no long-term capital gains tax on shares sold on the exchange. This is a subject on which I had written last month. Earlier, it was a routine procedure that such investors required the prior permission of the RBI before increasing their stake in an Indian company, as a more protectionist measure. The concerns were based on news of foreign investment emerging prematurely, thereby raising the price of stocks, which consequently made any acquisition more expensive for the investor.

The RBI enacted this as a part of the country’s efforts to bolster foreign exchange reserves and get more FDI as quickly as possible. Another purpose is to prevent the further weakening of the rupee, which fell last week to over 106.43 to the pound sterling. However, one condition applies: any non-resident investor should have already obtained and “continues to hold the control in accordance with Sebi (Substantial Acquisition of Shares and Takeover) Regulations” according to the RBI Governor

Market experts and regulatory bodies said that the RBI move was a pretty wise choice. Harshal Kamdar, Associate Director at PwC India claimed, “this liberalisation allows strategic acquirers to make secondary investments via the stock market without prior RBI approval”. In addition, it increases the amount non-resident strategic investors receive in terms of administrative assistance, so that commercial ties can be further consolidated.

The RBI also said that there were now a high number of choices for purchasing stocks; inward remittance through the normal banking channels, any account from an authorised bank, or debit to non-interest escrow account (in Indian rupees) maintained in India with a bank, or a dividend payable by Indian investee company, in which the said non-resident holds control. Alongside this procedural freedom comes a necessary stakeout, as acquisition should be in accordance with the pricing guidelines under the legislation relevant to the resident country of an investor (though in the Indian media, particular emphasis has been given to US investors).

Another view is that it might be more prudent to allow all foreign residents to come to the Indian market through similar routes to attract more foreign exchange into the country. The situation however is not completely hunky-dory – the manufacturing industry is still underdeveloped, and the mining industry is struggling with illegal coal mining taking place in hot spots such as Goa and Asansol in West Bengal. Government inefficiencies are rife and some Indian businesspeople are starting to grow tired with foreign investors muscling in on Indian enterprises.

However, as a young observer, it seems that this new measure might save precious time for investors and unnecessary bureaucracy, whilst investment limits still prevent foreign companies from developing a domineering relationship with Indian companies. Whether this news will prove to be a progressive measure remains to be seen, but hopefully it will bring substantial change in the capital market and improve the strength of the currently weak rupee.

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Categories: International politics

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