Why can’t private individuals in India take advantage of cheap lending abroad?

By Raghu Marwah and Priyanka Ajmani, R.N. Marwah & Company 

Although the cost of money in India has been reducing, in large part thanks to Governor Rajan’s generosity, the arbitrage with western economies is still at between 400 and 500 basis points. With the RBI easing regulations on commercial borrowing through the ECB, individual entrepreneurs are now looking forward to the moment when they will finally be able to dip their hand in the honeypot. Recently, this has led to widespread debate on the issue of overseas borrowing.

Let us consider whether resident individuals do have access to overseas borrowing and the extent to which the RBI has paved the way for this through the extant Foreign Exchange Management Act, 1999 (FEMA or the Ac’). There are three pillars to the analysis: the Capital Account Transactions Regulations, the Borrowing or Lending in Foreign Exchange and the Liberalised Remittance Scheme available to individuals.

Regulation 3 of the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 lays down that any person may sell or draw foreign exchange to or from an authorised person for a capital account transaction specified in the Schedules. One of the “permissible capital account transactions” under Schedule I, which deals with persons resident in India, is “Foreign currency loans raised in India and abroad by a person resident in India”.

To understand the aforementioned regulation it is important to refer to the Act defining who is a “person” and who is an “authorised person”. Person as per section 2(u) of the Act includes an individual. Section 2(c) of Act defines authorised person as an authorised dealer, money changer, offshore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities.

From the above, it is clear that foreign currency can be sold or drawn from an authorised person for capital account transactions subject to the regulations formulated by RBI, which therefore bars individual residents in India from raising monies abroad in the context of “permissible capital account transactions” under Schedule I since a foreign bank or lender is not deemed an authorised person.

We would also like to consider regulation 5 of FEM (Borrowing or Lending in Foreign Exchange) Regulations, 2000, which opens up two avenues for individual residents in India for borrowing overseas:

(1) Permission to borrow from an overseas bank for execution outside India of a turnkey project or civil construction contract or in connection with exports on deferred payment terms on fulfilment of certain conditions.
(2) Permission to borrow a sum not exceeding USD 250,000 or its equivalent from close relatives outside India.

While the first available avenue does not seem to be within the reach of an individual entrepreneur as the projects envisaged are of large size, the second (borrowing from close relatives abroad) necessitates that the loan be received in India and not used abroad.

The third pillar of our analysis looks at the Liberalised Remittance Scheme (LRS) of the RBI which permits remittances to individuals. Under the Liberalised Remittance Scheme, authorised dealers may freely allow resident individuals to make remittance payments with a value of up to USD 250,000 per financial year (April to March). This applies for any permitted current or capital account transactions or a combination of the two.

However, the LRS only permits remittance from India and does not permit or state that an individual resident in India can borrow overseas. As a matter of fact, it clarifies that borrowing in India for making said remittances under LRS is not permitted and such funds must be out of one’s own capital.

To sum up, the current RBI regulations do not seem to encourage individuals to borrow abroad. We hope that the RBI will soon relax the regulations governing individual borrowing overseas, giving said individuals an opportunity to meet their financing requirements from resources available worldwide. Resident individuals wanting to do business abroad and to borrow abroad under current regulations would be best advised to seek professional advice regarding the structure of their business model.

Raghu Marwah

Raghu Marwah

R.N. Marwah & Company, Bangalore, New Delhi, India
E: This email address is being protected from spambots. You need JavaScript enabled to view it.; W: www.rnm.in
Priyanka Ajmani

Priyanka Ajmani

R.N. Marwah & Company, Bangalore, New Delhi, India
E: This email address is being protected from spambots. You need JavaScript enabled to view it.; W: www.rnm.in

Published: January 2016 l Photo: Colourbox.de - AravindTeki

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