4.1

The establishment of preconditions/signposts have been outlined in Chapter 3. The timing and sequencing of phasing out of capital controls assumes operational significance in the move towards CAC and these issues are addressed in this Chapter.

4.2

Capital account convertibility is at present available for foreign direct investors under the extant FDI policy, portfolio investment for FIIs, NRIs and investment in non resident repatriable deposit schemes with banks in India. The international experience has shown that liberalisation of the capital account induces large capital inflows, which can cause a real appreciation of the exchange rate and erode the effectiveness of certain domestic macro economic policies. The Committee recommends that alongside further measures of liberalisation of capital inflows it is desirable to simultaneously liberalise controls on outflows as a means of contending with capital inflows. An early albeit cautious beginning to allow capital outflows is desirable as the system is attuned to a totally rigid ban on certain outflows and there is a need to develop confidence that some capital outflows, far from being destabilising, would be conducive to the overall efficiency of deployment of resources. Capital outflows, in the context of larger inflows, could relieve pressure on the exchange rate and the foreign exchange reserves and thereby enhance the effectiveness of domestic policies.

4.3

The Committee recognises that while the timing and sequencing of CAC proposed in this chapter can be undertaken under the existing laws and regulations relating to foreign exchange, they would be facilitated by the proposed changes in the legislative framework governing foreign exchange transactions. In this regard, Shri. P. Chidambaram, the Union Finance Minister in his speech while presenting the Union Budget for 1997-98 said

" As we progress towards a more open economy with greater trade and investment linkages with the rest of the world, the regulations governing foreign exchange transactions also needs to be modernised it is generally acknowledged that the Foreign Exchange Regulation Act, 1973 needs to be replaced by a new law consistent with full capital account, convertibility .........." [Part A - Paragraph 38]

4.4

In this Chapter, the timing and sequencing of liberalising both inflows and outflows of capital are set out within the framework of a phased three year road map, classified in relation to various economic agents, viz., resident and non resident corporates, banks, non bank financial institutions and individuals. Concomitant measures for the development of financial markets to handle the enhanced mobility of capital flows are also set out.

4.5

The banking system in India has been insulated from overseas markets for decades. Severe restrictions have been placed on banks borrowing funds from overseas or investing/lending abroad. Arbitraging between domestic and overseas markets have been strictly prohibited. The Committee recommends several measures for liberalising capital transfers by banks. Having regard to the fact that large scale short-term borrowings can be destabilising, the Committee recommends limits on such borrowings by the banking system. At the same time, a level playing field is to be ensured and the phased relaxation of controls should be concurrent with measures undertaken to ensure such a level playing field. In the area of foreign direct investment and portfolio investment, the Committee recommends complete elimination of the prior approval process from exchange control for investment/disinvestment.

4.6

Having regard to the need to keep external debt within sustainable limits, the Committee has proposed continuance of the policy of ceilings on external commercial borrowings (except for loans with long maturities). The Committee recommends simplification of the procedure for investments overseas in joint ventures/subsidiaries and substantial increase in the value limit for such investments (without prior approval) which is expected to make Indian industry competitive. Moreover, the Committee recommends that the exacting repatriation stipulations for such investments should be totally removed.

4.7

The Committee is of the view that a start should be made to liberalize outflows by individual residents. This will lend credibility to the commitment for CAC and give confidence to both residents and non residents that their genuine requirements for capital transactions are adequately met.

4.8

The various measures for removing capital controls and the timings and sequencing thereof proposed by the Committee are tabulated in Chapter. The rationale for the measures is given in the paragraphs following the tabulated list of measures.

Capital Account Convertibility- Timing and Sequencing of Measures

($ indicates US dollars)

Item

Present Position

Phase I

Phase II

Phase III

1997-98

1998-99

1999-2000

1.

CORPORATES/BUSINESSES

A.

Corporates/Businesses - Residents

1.

Issuing foreign currency

Not permitted

To be permitted

Same as

Same as

denominated bonds to residents

without any ceiling

Phase I

Phase I

(only rupee settlement) and

.

investing in foreign currency

denominated bonds and deposits

(only rupee settlement).

2.

Financial capital transfers abroad

Not permitted.

$ 25,000 per annum.

$ 50,000 per

$ 100,000 per

including for opening current/

annum.

annum.

chequeable accounts.

3.

Accessing capital markets abroad through

Permitted

No approval to be

Same as

Same as

GDRs & ADRs/ other forms of equity issues.

individually by

taken from RBI/

Phase I

Phase I

Government. Approval

Government Reporting

under FERA given

within 30 days from

by RB1.

close of issue

4.

External Commercial Borrowings(ECBs)

ECBs are subject to

Queuing for

Same as

Same as

overall ceiling with

purposes of

Phase I

Phase II

sub-ceilings as indicated

implementing

except for

below:

ceiling on ECB

loans with

(i) Import linked

while ensuring

average

short-term loans (Buyers/

that relatively

maturity of

Suppliers credit) for less

smaller

7 years and

than 3 years (i.e., 35

borrowers are

above to be

months) approved by RBI

not crowded

outside

subject to sub- ceiling

out by a few

ceiling.

fixed by Government.

very large

ii) Loans beyond 35 months

borrowers. No

approved by Government.

restrictions on end use

iii) US $ 3 million for a

of funds.

minimum period of 3

years for business related

Loans for

expenses including

periods with average

financing rupee cost of

maturity of 10

the project - approved by

years and above

RBI within sub-ceiling

to be kept outside the

fixed by Government.

ceiling.

iv) All other loans are

approved by Government

(generally for financing

requirements of

infrastructure projects, etc.).

5.

Foreign Currency Convertible

Permitted

To be within ECB

Same as

Same as

Bonds/Floating Rate Notes

individually by

celling with same

Phase 1

Phase I

Government within

procedure viz.

overall ECB ceiling.

queuing vide item 4.

6.

Loans from non residents

Allowed by RBI on a

To be allowed to

To be allowed

To be allowed

case-by-case basis

borrow up to $

borrow up to

to borrow up to

for loans from NRIs

250,000 per entity

$ 500,000 per

$ 1 million per

on non repatriable

with payment of

entity with

entity with

basis with

interest not exceeding

payment of

payment of

restrictions on

LIBOR without

interest not

interest not

interest payment and

restriction on period

exceeding

exceeding

end-use.

of loan, use of funds

LIBOR without

LIBOR

and repatriation of

restriction on

without

loan/interest.

period of loan,

restriction on

use of funds

period of loan,

and

use of funds

repatriation of

and repatria-

loan/interest.

tion of loan/

interest.

7.

Joint ventures/wholly owned

Proposals for

Direct investments

Same as

Same as

subsidiaries abroad

investments up to

abroad to be allowed

Phase I

Phase I

$ 4 million are

for ventures up to $

cleared by the RBI.

50 million by ADs

The extent of

subject to transparent

outflow is dependent

guidelines to be laid

upon the export

down by the RBI.

performance of the

Above $ 50 million

Indian promoter and

through Special

capability for

Committee. The

repatriation by way

current stipulation on

of dividend, etc.,

repatriation of

within a period of

earnings by way of

five years. Cases not

dividend etc. within a

covered by these

specified time period

criteria are cleared

should be removed.

by a Special

JVs/WOSs can be set

Committee.

up by all parties and

Recently, an

not restricted only to

announcement has

exporters/exchange

been made in the

earners.

Budget that balances

in EEFC accounts

can be used for

investments upto

$ 15 million without

the specific approval

of RBI.

8.

Project Exports

Indian project

Requirement of prior

Same as

Same

exporters are

approval by the RBI

Phase I

Phase I

required to approach

may be dispensed

the RBI for prior

with subject, to

approval for variety

reporting to the RBI.

of purposes while

executing the

projects abroad

9.

Establishment of offices abroad

Powers given to ADs

Any corporate entity

Same as

Same as

to allow remittances

may open offices

Phase I

Phase I

for exporters with an

abroad without the

average annual

need for prior

export turnover of

approval from RBI.

Rs. 150 lakhs and

Capital expenditure

above to open

towards opening of

representative/non-

the offices and current

trading offices.

expenditure for

Further, EEFC

maintenance could be

account holders have

subject to overall

been permitted to

value limits to be

utilise their EEFC

allowed by ADs.

balances without any

restriction for

establishing any type

of offices. Other

cases require RBI

approval.

10.

EEFC accounts for exporters and

50 per cent for EOUs

100 per cent of

Same as

Same as

exchange earners

and 25 percent for

earnings for all

Phase I

Phase I with

others- restrictions

exporters/exchange

additional

on use of funds for

earners to be allowed

provision that

current account and

to be held in EEFC

EEFC ac counts

permitted capital

accounts in India. Use

can be

account transactions.

of funds allowed for

held with banks

current and permitted

outside India at

capital account

the option

transactions with

of the exporter

cheque writing

and the exchange

facility.

earners.

B.

Corporates - Non Residents

(including OCBs)

1.

Foreign Direct Investment (FDI)

Currently OCBs are

Prior approval

Same as

Same as

allowed facilities similar to

of RBI not

Phase I

Phase I

NRIs. Other corporates are

required for

allowed to invest up to

FDI. Reporting

various proportions with

by ADs to the

RBI/Government approval

RBI.

under the FDI policy of the

Government.

2.

Portfolio Investment in India through

Allowed within the 24 per

To be allowed to

Same as

Same as

stock exchanges in shares/

cent limit (can be increased

all non-residents

Phase I

Phase I

debentures.

to 30 per cent at the option

without prior

of the company) which

approval by

includes portfolio

RBI. Designated

investment by NRIs, FIls &

ADs should be

OCBs subject to approval

required to

by the RBI which is valid

report to the

for a period of five years.

RBI.

The investment restricted to

1 per cent by individual

NRIs/OCBs and 10 per

cent by individual FIIs.

Corporates, other than

OCBs and FIIs, are not

permitted.

3.

Disinvestment

Disinvestment as

RBI approval to be

Same as

Same as

approved by the RBI

dispensed with.

Phase I

Phase I

except where sales

are made through

stock exchange

under portfolio

investment scheme.

II.

BANKS

A.

Banks - Residents

1.

Loans and borrowings from overseas

ADs are permitted to

(i) Each bank may be

Same as

Same as

banks and correspondents including

borrow up to $ 10

allowed to borrow

Phase I except

Phase I except

overdrafts in nostro account

million from their

from overseas

that the ceiling

that the ceiling

overseas offices/

markets, short-term

will be 75 per

will be 100 per

correspondents

(up to one year) and

cent of

cent of

without any

long-term (over one

unimpaired

unimpaired

conditions on end

year), to the extent of

Tier I capital

Tier I capital

use and repayment of

50 per cent of the

with a sub-

with a sub-

such borrowings.

unimpaired Tier I

limit of one

limit of one

capital with a sub

third (i.e., 25

third (i.e.,

limit of one third (i.e.,

per cent of

33.33 per cent

16.67 per cent of

unimpaired

of unimpaired

unimpaired Tier I

Tier I capital)

Tier I capital)

capital) for short-term

for short- term

for short- term

borrowings.

borrowings.

borrowings.

(ii) No restrictions on

use of funds and

repayment. Prudential

norms regarding open

position and gap

limits to continue.

2.

Investments in overseas markets

Banks allowed to

Investments may be in

Same as

Same as

invest in overseas

overseas money markets,

Phase I

Phase I

money markets up

mutual funds and

to $ 10 million.

foreign securities. To be

allowed subject

only to (i) requirements

of Section 25 of BR Act

1949* (ii) open

position/gap limits.

3.

Fund based /non fund based facilities

Cleared by RBI/

To be left to banks'

Same as

Same as

to Indian joint ventures and wholly

Special

discretion - only

Phase I

Phase I

owned subsidiaries abroad

Committee.

restriction to be Section

25 of BR Act.

4.

Buyers' credit/acceptance for

Depending on

To be allowed subject

Same as

Same as

financing importer/their bankers for

amount cleared by

only to Section 25 of

Phase I

Phase I

buying goods and services from India

ADs/EXIM Bank/

BR Act.

(including financing of overseas

Working Group.

projects)

FERA approval

required from RBI.

*

Note :

Section 25 of the Banking, Regulation Act, 1949 stipulates that the assets in India of every bank at the close of business on the last Friday of every quarter shall not be less than 75 per cent of its demand and time liabilities in India.

5.

Accept deposits and

Not allowed other

To be allowed without

Same as

Same as

extend loans

than under existing

any ceilings - assets/

denominated in foreign

foreign currency

liabilities mismatch to

Phase I

Phase I

currencies

deposit schemes.

be taken into overall

from /to individuals

open position /gap

(only rupee settlement)

limits

6.

Forfaiting

Exim Bank alone has

All ADs should be

Same as

Same as

been permitted by

permitted to

Phase I

Phase I

RBI to do forfaiting

undertake forfaiting.

B.

Banks - Non Residents

1.

Rupee Accounts of non resident

Used only for

Forward cover to be

Same as

Non resident

banks

merchant based

allowed to the extent

Phase I

banks may be

transactions -

of balances.

allowed to

investments not

Cancelling/

freely open

allowed. Overdrafts

rebooking to be

rupee accounts

allowed upto Rs.

allowed. The present

with banks in

150 lakhs for normal

overdraft limit could

India without

business

be increased and

any restrictions

requirements for

limited investments

on their

temporary periods.

may be allowed in

operations.

rupee accounts

III.

NON BANKS - FINANCIAL

A.

Non Banks - Financial - Residents

1.

SEB I registered Indian

Not allowed

Overall ceiling of

Overall ceiling

Overall ceiling

investors (including Mutual Funds)

$ 500 million and the

of $ 1 billion.

of $ 2 billion.

investments overseas

ceiling should be so

operated that a few

large funds do not

pre-empt the overall

amount.

2.

All India Financial Institutions

Borrowings from

(i) Borrowings more

(i) Same as

(i) Same as

overseas markets or

than one year to

Phase I

Phase I

investments abroad

continue within ECB

subject to RBI/

ceiling with

Government prior

Government approval.

approval

(ii) Short-term

(ii) Short-term

(ii) Short-term

borrowings to be

borrowings to

borrowings to

allowed subject to

be allowed

be allowed

limits. Investments in

subject to

subject to

short term

limits.

limits. Invest-

instruments to be

Investments in

ments in short

permitted within

short term

term instru-

limits up to the extent

instruments to

ments to be

of liabilities maturing

be permitted

permitted

within one month.

within limits

within limits

up to the extent of

up to the extent

liabilities

of liabilities

maturing within 3.

maturing within 6

months

months.

B.

Non Banks - Non Residents

1.

FlIs

(a)

Portfolio Investment

(a) Investments in

To be allowed without

Same as

Same as

secondary market

RBI prior approval.

Phase I

Phase I

allowed once FII is

Designated ADs

registered with

would be required to

SEBI subject to 24

report to RBI

per cent ceiling

(can be increased

to 30 per cent at

the option of the

company) which

includes portfolio

investment by

NRIs, FlIs and

OCBs with a 10

per cent limit for

individual FlIs and

1 per cent by

individual NRIs/

OCBs. FERA

approval is given

by RBI which is

valid for a period

of five years.

(b)

Primary market investment/private

Primary market

RBI approval not

Same as

Same as

offering/private

required. Designated

Phase I

Phase I

placement

ADs to report to the

placement allowed

RB1.

with RBI approval

up to 15 per cent of

the new issue/

capital.

(c)

Disinvestment

(i) Disinvestment

RBI approval for

Same as

Same as

through stock

disinvestment to be

Phase I

Phase I

exchange allowed

dispensed with.

freely.

(ii) Other routes of

disinvestment

require RBI approval

(d)

lnvestments in debt instruments

Permitted to invest

Maturity restrictions

Same as

Same as

in dated Government

on investments in

Phase I

Phase I

securities of Central

debt instruments

and State

(including, treasury

Governments

bills) to be removed.

(excluding Treasury

FII investments in

Bills) both in

rupee debt securities

primary and

to be kept outside

secondary markets.

ECB ceiling but

ECB ceiling

could be part of a

includes FII

separate ceiling

investment in rupee

debt instruments.

The Debt Funds of

FIIs are also allowed

to invest in corporate

debt securities

(NCDs, Bonds, etc.)

listed or to be listed.

FIIs can invest in

equity and debt

(NCDs, Bonds, etc.,)

in the ratio of 70:30,

Debt Funds of FIIs

can invest upto 100

per cent in debt

instruments subject

to a ceiling,

prescribed by SEB1.

IV

INDIVIDUALS

A

Individuals -Residents

1.

Foreign currency denominated

Not permitted

To be permitted

Same as

Same as

deposits with banks/corporates in

without ceiling

Phase I

Phase I

India (only-rupee settlement)

2.

Financial capital transfers including

Not permitted

$ 25,000 per annum

$ 50,000 per

$ 100,000 per

for opening current/chequeable

annum

annum

accounts

3

Loans from non residents

Residents are

Residents to be

Residents to be

Residents to be

allowed to obtain

allowed to take loans

allowed to take

allowed to take

interest free loans on

from non residents up

loans from non

loans from non

non repatriation

to $ 250,000 per

residents up to

residents up to

basis from non

individual with

$ 500,000 per

$ 1 million per

resident relatives for

payment of interest

individual with

individual with

personal and

not exceeding

payment of

payment of

business purposes

LIBOR, without

interest not

interest not

other than

restrictions on period

exceeding

exceeding

investment. Other

of loan, repatriation

LIBOR,

LIBOR,

cases need RBI

of principal/interest

without

without

approval.

and use of funds.

restrictions on

restrictions on

period of loan,

period of loan,

repatriation of

repatriation of

principal/

principal/

interest and use

interest and

of funds.

use of funds.

B

Individuals : Non Residents

1

Capital transfers from non

Not allowed;

$ 25,000 per year*

$ 50,000 per

$ 100,000 per

repatriable assets held in India

however, a few cases

year*

year*

(including NRO and NRNR RD

allowed on

accounts)

sympathetic grounds.

2.

Foreign Direct Investment in India

(a) FDI for NRIs

No RBI permission

Same as

Same as

(FDI) (other than in real estate)

with repatriation

for FDI subject to

Phase I

Phase I

benefits are to be

reporting by ADs.

cleared by RBI/

Government under

FDI policy.

(b) FDI for other non

resident individuals

are to be cleared by

Government and

RBI.

*

No fresh NRNRRD accounts from 1997-98. On maturity the balances in the accounts get merged with other non repatriable funds or depositors can shift the maturity proceeds to a special 3 year NRE account with full repatriation benefit on maturity. If prematurely withdrawn from special NRE account, funds will get merged with other non repatriable funds of the non resident. In case of investments permitted on non repatriation basis on maturity or on disinvestment, the proceeds will be merged with other non repatriable assets.

3.

Portfolio Investment in India through

Allowed to NRIs

Allowed to all non

Same as

Same as

stock exchanges.

within the 24 per

residents without RBI

Phase I

Phase I

cent ceiling (can be

prior approval.

increased to 30 per

Designated ADs

cent at the option of

would be required to

the company) which

report to RBI.

includes portfolio

investment by NRIs,

FlIs and OCBs

subject to approval

by the Reserve Bank

which is given for a

period of five years.

The investment

restricted to 1 per

cent by individual

NRIs/OCBs and 10

per cent by

individual FlIs.

4.

Disinvestment

Disinvestment to be

RBI approval to be

Same as

Same as

approved by RBI

dispensed with.

Phase I

Phase I

except where sales

are made through

stock exchange

under portfolio

investment scheme.

V.

FINANCIAL MARKETS

1.

Foreign Exchange Market

(a)

Forward contracts

Forward contracts

To allow all

Same as

Same as

are allowed to be

participants in the

Phase I

Phase I. No

booked on the basis

spot market to

restrictions on

of business

participate in the

participants in

projections in

forward market; FlIs,

spot/forward

respect of exporters

non residents and non

markets i.e.,

and importers. Also

resident banks having

participation

forward cover

rupee assets can be

allowed

allowed for non

allowed forward cover

without any

residents for limited

to the extent of their

underlying

purposes such as

assets in India. Banks

exposure.

dividend remittance

to be allowed to quote

and freight/passage

two way in rupee to

collections.

overseas banks/

correspondents both

spot and forward

subject to their

position/gap limits.

Those with economic

exposures to be

allowed to participate

in forward market.

(b)

Authorised dealers

Authorised dealers at

All India FIs which

Same as

To allow select

present are only banks.

comply with the

Phase I

NBFCs to act

reaulatorv/prudential

as full-fledged

requirements and

authorised

fulfil well defined

dealers on the

criteria should be

basis of criteria

allowed to participate

similar to FIs.

as full-fledged ADs in

the forex market.

(c)

Products

Currently the only

All derivatives

Direct access to

Same as

derivative in the

including rupee based

overseas

Phase I & 11

rupee $ market is the

derivatives to be

markets by

forward contract.

allowed. Futures in

corporates for

ADs have been

currencies and

derivatives

allowed to enter into

interest rates to be

without routing

Rupee/$ currency

introduced with the

through ADs

swaps with

system of screen-

Phase I to

counterparties in

based trading and an

continue.

India subject to open

efficient settlement

position and gap

mechanism.

limits. Cross

currency derivatives

and interest rate

derivatives allowed

for covering

underlying

exposures - to be

routed through ADs

2.

Money Market

Banks allowed to

Market segmentation

Same as

Same as

lend and borrow

to be removed.

Phase I

Phase I

freely. FIs allowed to

Deposit rates to be

lend with no limit/

deregulated and

allowed to borrow

minimum period

within small limits.

restrictions to be

Others allowed to

removed. Restrictions

lend to primary

on participants in the

dealers for minimum

money market to be

amount of Rs. 10

freed. Level playing

crores. MFs

field for all banks , FIs

participate only as

and NBFCs regarding

lenders. Residual

reserve requirements

restrictions on

and prudential norms.

deposit rates

applicable to public

deposits; minimum

period for CDs/

MMMFs/fixed

deposits specified.

3.

Government Securities Market

A number of

(i) Access to FIIs in