The Reserve Bank of India (RBI) Governor, Shaktikanta Das announced today, as part of the RBI Monetary Policy that Indians can now remit money to the International Financial Services Centre (IFSC), through the Liberalised Remittance Scheme (LRS). The move may not translate into anything material for individuals immediately, but it is largely aimed at popularising the Gujarat International Finance Tec-City Co Ltd, that is India’s first IFSC and help companies situated there to attract capital.
What is Liberalised Remittance Scheme (LRS)?
The LRS is a scheme whereby Indian individuals can send money abroad without any questions asked. Under the LRS, you can remit up to $250,000 a year aboard. You can use this money for travel, to fund your children’s education who may be studying there or even to meet your expenses there if you are regular visitor to any country abroad. It can also be used to buy a capital asset or invest in financial instruments like equity shares or mutual funds.
Now, the RBI has also allowed you to send money to the IFSC under this scheme. This means that you can now hold a foreign currency denominated account in an IFSC. This money, Das said today in his announcement, can only be used to make investments in financial instruments offered by any institution at the IFSC.
What is an IFSC?
A IFSC is a global financial centre that can be set up in any country. But the land on which it is set up, works technically like a foreign jurisdiction. India’s IFSC is set up in Gandhinagar in the state of Gujarat. An IFSC is set up typically to attract foreign capital to India and be made available to institutions, which would otherwise require the foreign entity setting shop here, run around for multiple permissions and be subjected to multiple regulations, all done in order to facilitate making investments in India.
An IFSC also helps domestic institutions raise money in foreign currency instead of going abroad. Says Rajiv Anand, Executive Director (Wholesale Banking) - Axis Bank: “Opening a Dollar deposit account for Indian residents has become much easier, albeit with restrictions on use.”
How does it help the retail investor?
Today’s RBI announcement will not translate to anything substantial, immediately.
RBI has clearly said that money remitted by individuals to the IFSC through the LRS must only be used for making investments. This means any institution that has opened shop at the IFSC can structure foreign currency products and sell them to the individual investor. To be sure, the way an IFSC’s jurisdiction is structured, even Indian firms and banks are foreign entities on IFSC land. For instance, a domestic bank can raise foreign currency for domestic companies from domestic investors. For the individual investor, this opens up the door for one more new financial instrument to invest in, as and when this happens.
To facilitate this, the RBI has allowed the opening up of foreign currency bank account at the IFC.
By restricting the LRS money to be used only for investment purposes, you will not be able to open just a foreign currency bank account and fund your expenses abroad. Typically, you open a foreign currency bank account abroad if you want to spend the money abroad. The LRS permission granted today is mainly targeted to help companies raise money in foreign currency. RBI has also said that your money must not lie idle for more than 15 days in your IFSC Bank account. Else, it would be remitted to you back. Swastik Nigam, Founder & CEO, Winvesta a fintech firm that allows Indians to invest abroad, says this could be a challenge. “This is definitely a step in the right direction. But we will have to see how the restrictions on the capital unfold and whether the objectives of GIFT City in attracting investments under LRS are met. The returning of funds within 15 days may be a tight provision, but can also spur a new set of investment opportunities,” he says.