The Reserve Bank of India (RBI) has lifted a major roadblock for investments in the International Financial Services Centre (IFSC) at GIFT City, Gujarat, through the Liberalised Remittance Scheme (LRS) route.
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Indian residents can now make remittances to IFSCs under the LRS framework. They are allowed to open a foreign currency account (FCA) in IFSC. Until now, any funds lying idle in FCA for up to 15 days had to be repatriated to the domestic rupee account.
A new RBI circular has now allowed unutilised funds to be repatriated and surrendered to an authorised dealer bank within 180 days.
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“The condition of repatriating any funds lying idle in the account for a period up to 15 days from the date of its receipt is withdrawn with immediate effect and shall now be governed by the provisions of the scheme as contained in the aforesaid master direction on LRS,” an RBI circular said on April 26.
Many investors had faced difficulties in making investments in IFSC as the transaction timelines often got extended due to various reasons, said experts.
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“The new rules remove the ambiguity surrounding this issue and bring remittances into IFSC at par with foreign remittances under the LRS framework, which allows for a longer 180-day window for repatriation of unutilised funds,” said Vaibhav Gupta, partner, Dhruva Advisors.
Banks can now offer interest-bearing accounts to resident individuals, which was not allowed under the earlier regime. This will help banks raise low-cost funds and garner deposits which are more sticky in nature, said experts. Investors stand to benefit by earning interest on the funds parked with the banks.
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“Residents may be able to retain their funds in IFSC for a longer period, while banks operating in IFSC will be able to offer interest-bearing accounts to their customers, which will help them build their liability book,” said Suresh Swamy, partner, Price Waterhouse & Co.
New norms help align the IFSC at GIFT City with other international peers to some extent. “Several other international financial centres do not have a limit on repatriating funds even after 180 days. For instance, the Dubai International Financial Centre is situated in Dubai’s free zone and does not impose any restriction on repatriation of funds as such,” said Sumit Kochar, partner at Dolce Vita Trustees.
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Challenges
The current circular, however, only deletes the 15-day repatriation condition of the February 2021 circular, according to Yashesh Ashar, partner, Illume Advisory. The extant circular still remains valid with regard to the end use restrictions of making permissible investments in IFSC, he said.
This means that money can be remitted to IFSC only for investment in securities, and not for other purposes such as educational or medical requirements as allowed by the LRS framework.
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The combined limit for investment under the LRS route to IFSC and to other countries still stands at $250,000. “The funds remitted by residents from onshore accounts to IFSC foreign currency accounts but not invested in securities and subsequently repatriated to onshore Indian accounts is reckoned to be within the threshold limit of LRS. This means residents will still remit funds to foreign currency accounts on an ad hoc basis and not for accumulations, which would exhaust their limit of $250,000 per fiscal,” said Kochar.
The 2023 Budget had increased the TCS on foreign remittances under LRS from 5% to 20%, discouraging investment through LRS as the TCS amount is blocked for the resident at the time of remittance. This remains a hurdle. Additionally, residents cannot settle domestic transactions with other residents using IFSC foreign currency accounts, said Kochar.
