Introduction
Liberalised Remittance Scheme (“LRS”) was introduced in 2004 by the Reserve Bank of India (“RBI”) as a liberalisation measure to facilitate resident individuals to remit funds abroad for permitted current or capital account transactions or both. LRS currently allows resident individuals an outward remittance of up to USD 250,000 per financial year .
Previously, resident individuals were not allowed to make remittances under the LRS to International Financial Services Centres (“IFSCs”) established in India. An IFSC can be set up in Special Economic Zone (“SEZ”) in India with central government permission and deals with flow of finance, financial products and services across borders. The idea of an IFSC is to offer cutting edge, ease of doing business and regulatory environment which is seen in leading international financial centers such as New York, London and Singapore.
RBI Circular of February 16, 2021
Recently, the RBI on February 16, 2021, issued a circular, allowing resident individuals to make remittances under LRS to IFSCs established in a SEZ in India. This is done to deepen the financial markets in IFSCs and provide an opportunity to resident individuals to diversify their portfolio.
The circular also enumerates certain conditions to be followed while investing in IFSCs:
- Remittances will be permitted only for making investments in IFSCs in securities.
- Resident individuals are allowed to open a non-interest bearing Foreign Currency Account (“FCA”) in IFSCs for making the permissible investment under LRS.
- Any fund lying idle in such FCAs for a period up to 15 days from the day of its receipt shall be immediately repatriated to the resident account of the investor in India.
- Resident individuals are not allowed to settle any domestic transaction with other residents through such FCAs held in IFSC.
- AD Category-I banks are the gatekeepers to ensure compliance with all other terms and conditions under the LRS including the reporting requirement.
This note summarizes the legal development and is not intended as legal advice. Should you require further clarifications in this regard, we will be happy to help. Algo Legal has deep expertise in advising clients on RBI regulations.
Authored by Abhinav Bhalaik, Partner, Head – M&A, Securities Law & PE Practice; Siddharth Prasad, Partner – M&A, Securities Law and PE Practice
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