Investing in Overseas Shares under Liberalized Remittance Scheme

Several Indians transfer their surplus income abroad for different purposes like investments and to their children who are studying abroad. Such transfers are made under the liberalized remittance scheme (LRS). As per a circular issued by the Reserve Bank of India (RBI) in August 2022, any money that has been transferred overseas but not utilized for 180 days must be returned back to the country.

What is Liberalized Remittance Scheme (LRS)?

The liberalized remittance scheme basically allows Indians to freely transfer up to USD 250,000 every financial year (April – March) for any permissible current or capital account transaction or a combination of both.

Note: Any remittance amount exceeding USD 250,000 shall require a prior permission from the RBI.

Investing in Overseas Shares

All investments by residents of India in overseas shares are regulated under Foreign Exchange Management (Overseas Investments) Rules, 2022 (ODI Rules) as notified by the Finance Ministry in August 2022.

Who is Eligible to Transfer Funds Using LRS?

Only individual Indian residents that hold a Permanent Account Number (PAN) are allowed to transfer funds under the provisions of LRS. Partnership firms, HUFs, trusts, corporates, etc. do not fall under the scope of this scheme and are considered exceptions.
However, minors that have Form A2 countersigned by their natural guardians shall be able to avail of the benefits of the LRS.

Transactions Permitted under LRS

Capital Accounts Transactions

• Opening a foreign currency account overseas with a bank.
• To acquire immovable property overseas, overseas direct investment (ODI) and overseas portfolio investment (OPI), while complying with the Foreign Exchange Management (Overseas Investment) rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022.
• For extending loans that include loans in INR to non-resident Indians.

Items Prohibited under the Scheme

Some transfers prohibited under the liberalized remittance scheme are:

• Transfers for reasons that have been specifically prohibited under Schedule-I (like buying lottery tickets, sweep stakes, prohibited magazines, etc.) or any act regulated under Schedule-II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
• Payments from India for margins or margin calls to foreign exchanges/foreign counterparties.
• Payments to purchase foreign currency convertible bonds (FCCBs) issued by Indian companies in overseas secondary market.
• Transfers to trade in foreign exchange abroad.
• Direct or indirect capital account transfers overseas to nations listed as ‘non-cooperative countries and territories’, from time to time, by the Financial Action Task Force (FATF).
• Direct or indirect transfers to individuals or entities identified to pose a significant risk of committing acts of terrorism, which is advised to the banks separately by the RBI.
• Any person residing in India who acquires equity capital in a foreign entity that is deemed as ODI shall submit bank share certificates or other related documents as per the applicable laws of the host country or the host jurisdiction, however the case may be, as proof of such investments in the foreign entity within six months from the date of effecting remittance or the date on which the dues to such person are capitalized or the date on which the amount was permitted to be capitalized, whatever the case may be, to the designated authorized dealer (AD).
• An individual residing in India, through their AD bank, shall receive a Unique Identification Number (UIN) from RBI for the overseas entity, where the intended ODI shall be made prior to transferring it to another entity or to acquire equity capital in an overseas entity, whichever is earlier.
• Individual resident in India making ODI shall appoint an AD bank and direct all transactions related to a particular UIN through such ADs. In cases where more than one person residing in India makes financial commitment to the same overseas entity, all such individuals shall send all transactions related to that UIN through the AD bank appointed for that UIN.
• A person residing in India that have ODI in an entity overseas, wherever applicable, shall realize and return all dues receivable from the foreign entity with respect to investment in such foreign entity to India. The consideration received on account of transfer of such ODI and the asset’ net realizable value on account of the liquidation of the foreign entity as per the laws of the host country or the host jurisdiction, as the case may be, within 90 days from the date when such receivables fall due or the date of such transfer or disinvestment or the date of the actual distribution of assets made by the official liquidator.
• A person residing in India who is eligible to carry out ODI transactions may make payments towards earnest money deposit or get a bid bond guarantee from an AD bank to participate in bidding or tender procedure for acquiring a foreign entity.

What are the Obligations of Any Individual Resident in India?

 

In case of an open-ended bid bond guarantee, it shall be transformed into a close-ended guarantee within three months from the date the contract was awarded.

Reporting

• A person resident in India shall report through appointed AD banks in the method mentioned in this regulation and in the format provided by the RBI.
• Any individual resident in India who has made ODI, financial commitment or undertaking disinvestment in a foreign entity shall report the following:

• Any person residing in India who acquires equity capital in a foreign entity that is deemed as ODI shall submit an Annual Performance Report (APR) with respect to each foreign entity every year by 31^st December and where the accounting year of such foreign entity ends on 31^st December, the APR shall be submitted by 31^st December of the next year, considering that no such reporting shall be required where:

Restrictions on the Frequency of the Remittance

Under the liberalized remittance scheme, there are no restrictions on the frequency of remittances. However, the total amount of foreign exchange bought from or transferred through all sources in India during a financial year should be within USD 250,000.

As per this scheme, once a transfer for any amount up to USD 250,000 is made in a financial year, the resident would not be eligible to make any more transactions, even if the profits of such investments have been brought back into the country.

Some Frequently Asked Questions

What is the currency for remittance?

Any freely convertible foreign currency can be used for remittances.


What are the credit facilities (fund or non-fund based) in INR or foreign currency extended by AD banks to resident individuals?

The LRS does not cover extension of fund and non-fund-based facilities by the AD banks to their resident individual customers to enable transfers for capital account transactions under LRS. However, under the scheme, AD banks may extend fund and non-fund-based facilities to resident individuals to facilitate current account remittances.

Can bankers open foreign currency accounts in India for residents under the LRS?

No

Whether prior approval is required to open, maintain and hold foreign currency account with a bank outside India to make transfers under the LRS?

No

Conclusion

Several Indians choose to transfer money every year to other countries for various reasons, be it for their children studying abroad or for investment purposes. Such transfers must be made in accordance with the remittance scheme. It must also be ensured that any transaction beyond USD 250,000 must be pre-approved by the RBI before it is transferred.