Sandeep Shanbhag, Director, Wonderland Investments
Apple, Google, Facebook, Microsoft, Coca-Cola are globally recognised brands. And all of us routinely use their products and services. But did you know that you can participate in the fortunes of these companies by owning their shares in your portfolio? As per Indian law, you can be a shareholder in these global blue-chips. Or if financial assets are really not your thing, then how about buying some real estate - not in India - but a spanking new condominium in New Jersey, perhaps, or a villa in Dubai?
Indian law allows its residents, including minors, to freely invest/remit up to $125,000 per financial year abroad to buy shares, bonds or any other asset including property, without taking prior approval of any authority. This is under the facilities provided by what is known as the Liberalised Remittance Scheme (LRS) of the RBI. One can also open foreign currency accounts with banks outside India to carry out transactions permitted under the scheme.
Pretty much any legal asset(s) - listed/unlisted shares, ESOPs, units of mutual funds, venture funds, unrated debt securities, promissory notes, paintings and works of arts - can be bought under LRS. Even a loan abroad taken by a resident Indian when he was an NRI could be repaid under the LRS. Real estate can also be purchased either outright or in installments. Resident investors may also set up joint ventures or wholly owned subsidiaries outside India for business activities. This facility is in addition to the funds that are already available for purposes such as private or business travel, studies, medical treatment, etc. However, remittances for gifts and donations abroad cannot be made separately and are included under the LRS limit.
A number of activities, however, are strictly prohibited. These include remittance for purchase of lottery tickets, non-delivery based transactions, i.e., margin calls to overseas exchanges, and trading in foreign exchange abroad. Remittances to Bhutan, Nepal, Mauritius and Pakistan or to countries identified by the Financial Action Task Force as "non-cooperative countries and territories" are also not allowed, and so are remittances that directly or indirectly fund terrorism activities.
Resident individual investors can retain and reinvest the income earned on investments made under the LRS. So, it is not mandatory to repatriate back to India the funds generated out of the overseas investments. Also, the limit is per person per year and it is legally permissible to consolidate the remittances under LRS in respect of all family members - of course, subject to the individual members complying with the terms and conditions of the scheme.
It is mandatory to furnish one's PAN to make remittances under the scheme. There is no restriction on the frequency of investments. The individual will have to designate a bank branch through which all remittances will be made. The investor should have maintained the bank account for at least a year prior to the remittance. In case of new customers, the bank is expected to carry out due diligence on the opening, operation and maintenance of the accounts. Further, the bank will obtain bank statements for the previous year from the applicant to satisfy themselves regarding the source of funds. If such a bank statement is not available, copies of the latest income tax assessment order or tax returns filed by the applicant may be obtained.
Changes in LRS limit
While making the remittance, an investor must submit an application-cum-declaration in a specified format regarding the purpose of the remittance and declare that the funds belong to him and will not be used for the purposes prohibited under the scheme. Once a remittance is made for an amount up to $125,000 during the year, no further remittances can be made even if the proceeds of the investments were to be brought back to India during the same year. Last, the remittances can be made in any freely convertible foreign currency equivalent to $125,000 in a financial year.
High net-worth individuals seeking geographical as well as currency diversification are the ideal candidates for LRS. However, all the rules pertinent to investments in general apply - and the most important one being - "Know what you buy, buy what you know". This is by far the single biggest maxim that all investors, regardless of ticket size or geography, will do well to follow. Hence, just because overseas investments are a reality now, it doesn't mean that you should rush to avail of the same. These should fit into your risk, return, liquidity and tax-efficiency profile as well as integrated into your financial goals.
Prior to August 2013, the annual limit under LRS was $200,000. However, in view of the then worsening current account deficit and currency volatility, the limit was scaled down to $75,000. In June 2014, as the foreign exchange market was seen to be stabilising, the limit was stepped up to the current level. In its recent monetary policy statement, the RBI has declared that it has decided to double the limit to $250,000. However, so far this has only been a statement - as on date the limit hasn't yet been formally increased. Watch this space for updates!
(The author is Director, Wonderland Investments, a tax and investment advisory firm)