HNIs rush to invest in LRS funds to comply with new RBI diktat

As a new Reserve Bank of India (RBI) rule restrains high net-worth individuals (HNIs) from keeping money beyond six months in offshore bank accounts, overseas investment in fixed deposits (FDs) by the affluent Indians are expected to come down significantly. In contrast, the investments in Liberalised Remittance Scheme (LRS) will continue as usual.

As per an estimate, India’s high net-worth individuals invest over $24 billion in various financial instruments overseas every year.

Affluent Indians, who have been legitimately parking a slice of their wealth outside the country for a decade, are in a fix. These rich residents, who spread their money across currencies and markets, are now unsure how to diversify their savings, with the RBI yet to spell out whether they can hold FDs with overseas banks. A new rule restrains them from keeping money beyond six months in offshore bank accounts.

The rule requires them to ‘invest’ the unused money remitted from India in foreign securities, mutual funds, properties and other permitted assets. Most interpret that ‘FDs’ are not included as permitted investments under the revised LRS, which allows a resident Indian to transfer $250,000 a year abroad to invest or lend. LRS rule is open for Indian HNI investors. However, LRS remittance must be from own funds - a person can’t borrow from a non-resident to invest. Also, a resident can’t transfer under LRS the money won in a lottery or gambling. While the new regulations allow an individual to invest in unlisted shares of overseas companies (as long as the entity is not into financial services and subject to other conditions on control and ownership), investment is not allowed in unlisted debt instruments.

Talking to Bizz Buzz, Vineet Bagri, Chief Executive, Athena Investments, said: “I don’t think if a significant amount will come back to India from overseas even if RBI doesn’t recognise FDs as investments. As regards to LRS, it will continue to be their favourite savings instrument as usual.”

A foreign bank will have a requirement of maintenance of minimum balance, but the new LRS framework does not provide flexibility to retain excess funds in the bank account beyond a period of 180 days.

Naresh Malhotra, a retired SBI official, said, “The question is the money to be remitted abroad for specific purposes. You can’t sit idle on the cash. Suppose, you want to buy a property or save money for providing education to your kids for a certain period of time, then it is ok.”

If you keep your bank account abroad for a large period of time, then the problem arises. Again, suppose you are investing under LRS, then there is not an issue at all. Simply speaking, putting one’s money in foreign bank for a bigger period of time then in some way India’s forex gets reduced to that extent which is not a good idea and hence unacceptable for the government, he said.

India’s wealthy individuals have invested all their surplus foreign remittances in various securities over the last few months to comply with a RBI diktat that ended last month.

It was in August last year when the central bank had issued a circular saying any money that has been remitted overseas by Indian residents and remains unutilised for more than 180 days needs to repatriated back into the country. Not to mention, the $250,000 limit may fall short for a resident who aspires to, say, buy a home overseas, or undergo a medical procedure, or study abroad. Hence, to meet such expenses, many high net-worth individuals (HNIs) have accumulated forex by sending up to $250,000 every year, even when there was no bona fide expense.

Apart from senior tax and legal practitioners, large banks, on behalf of their clients, had approached RBI for clarification. To add to their woes, the FAQs released by RBI a fortnight ago did not clear the air. Amid a widely shared perception that the central bank and the central government are putting rules in place to discourage overseas money transfers by resident individuals, it is increasingly felt that the LRS has significantly changed since 2004 when it was introduced as a virtually ‘no questions asked’ window. Along with the change in LRS rules, the recent increase in the rate of tax collected at source (TCS) on LRS remittances seem to suggest that the authorities want to rein such transfers. Some of the banks are alerting their wealthy clients that keeping funds lying in current accounts or FDs abroad would be a violation of the Foreign Exchange Management Act (FEMA). Indeed, even before the rules were changed last year, many Indians, some unwittingly, ended up on the wrong side of the complex law.

Foreign builders offer schemes where a person can get a completed house, but payment can be made over the next few years after completion. This is clearly a violation as the payment option over a few years is a loan.

Now, FDs will be out-of-bounds under LRS if they are construed as ‘unlisted debt instruments’. MNC banks have also asked RBI whether their clients in India can invest in ‘unregulated’ funds incorporated in centres like Delaware and Singapore - regimes where the ‘fund manager’ is regulated instead of the fund.