Soon after Rajan's policy statement of 2015, that annual LRS limit (per individual) was being revised from $125,000 to $250,000, many well-heeled Indians took advantage in the weeks before March 31.
MUMBAI: In February 2015, when then Reserve Bank of India governor Raghuram Rajan, having tamed the rupee, raised limits on individual overseas investment, several Indian businessmen, Bollywood celebrities and diamond merchants rushed to remit funds abroad to bet on stocks and properties before the financial year was out. Today, they are paying the price of exuberance and blindly trusting the RBI governor.
A fortnight ago, a dozen individuals, along with at least two large banks that handled crossborder fund transfers, were told by the Enforcement Directorate that they had overstepped investment limit under the liberalised remittance scheme. LRS was introduced in 2004 to allow Indians buy stocks and properties abroad. The scheme, however, cannot be used to take pure speculative bets on instruments such as derivatives.
Soon after Rajan's policy statement of 2015, that annual LRS limit (per individual) was being revised from $125,000 to $250,000, many well-heeled Indians took advantage in the weeks before March 31. RBI departments typically come out with supportive circulars within a few days — sometimes even on the same day — of the monetary policy announcement. However, in this case the central bank took an unusually long time in releasing the notification on LRS limit.
"No one knows why the circular was issued three months after the announcement. By then, 2014-15 was over. Now ED is questioning all additional investments over and above $125,000 in February, March and April of 2015. Many individuals, and some public sector banks, including two large ones, are being asked to explain why they should not be penalised.
This is a strange situation. Can't one trust the RBI governor's words on a subject like LRS? Rajan's language was clear and anyone reading the policy statement would have believed that the LRS limit revision was a done deal," a person familiar with the development told ET. Rajan had said, "On a review of the external sector outlook and as a further exercise in macro prudential management, it has been decided to enhance limit under LRS to $250,000 per person per year." In 2013, when the rupee was being hammered by many foreign portfolio managers, LRS ceiling was lowered to $75,000 as a "macro-prudential measure." Thanks to some stability returning to the foreign exchange market following inflow of NRI deposits under a special scheme, LRS limit was raised to $125,000 in June 2014 without end-use restrictions, except for prohibited foreign exchange transactions such as margin trading and lotteries. In February 2015 Rajan had also announced certain changes to the scheme in order to ensure ease of transactions. The former governor had categorically said the government had been consulted on the matter.
However, when the circular was issued in May, it was not with effect from date of announcement in February 2015. As a result, bankers and individuals who had remitted foreign exchange on basis of the RBI governor's statement and on the assumption that a formal circular was on the way have been caught on the wrong foot. "Besides using extra quota for the year (2014-15), some were keen to remit funds to companies in Jersey to escape inheritance tax on property investment in the UK," said a source.
Penalty on Foreign Exchange Management Act violations could be as high as three times the amount. In recent months the Income tax department and ED have been going through LRS deals with the fine-tooth comb to trace tax evasion and money laundering. For instance, many have been pulled up for not paying tax on deemed rental income from overseas properties bought under LRS.
