Blog
The Rapidly Falling Rupee
Since the end of March, the Indian rupee has fallen from Rs. 44.65 to Rs. 50.90 to the US dollar—a 14% drop in less than 8 months!
This rapid decline raises two major concerns. The first relates to the rate of change—such rapid changes in rupee exchange rates are not good for business or economic activity. The second relates to the nature of the change—a weak rupee increases both inflationary pressures and the fiscal deficit (mainly because of the increased cost of oil imports).
The Reserve Bank of India (RBI) and the Ministry of Finance have introduced a limited set of measures to address these issues.
While the RBI has reportedly intervened in the foreign exchange markets by selling US dollars (mainly to reduce volatility), the Ministry of Finance has sought to bolster demand for the Indian rupee by increasing the caps on foreign institutional investor (FII) holdings in government securities and corporate bonds. Each of these caps has been increased by US$ 5 billion, i.e., to US$ 15 billion and US$ 20 billion respectively. (Prior to this move, investment levels were fairly close to the earlier limits on FII holdings in these two classes of securities.) The RBI has also asked banks to clamp down on allowing their customers (primarily retail) to make margin payments for internet-based overseas foreign exchange trading.
At the same time, the RBI is also working to ensure that Indian banks and traders are better able to weather tightening liquidity conditions and widening credit spreads in international market. To that end, on November 15, 2011 the RBI increased (until March 31, 2012) the all-in ceiling permitted on various trade credits and advances (by 150 basis points). The RBI has also liberalized the rules allowing traders to set-off payables on their imports against receivables on their exports.
While these measures are all welcome, they may be insufficient. Policy makers would be well advised to look at introducing more structural changes that will address the gathering storm of high inflation, high interest rates, reducing growth rates and a rapidly falling Indian rupee.
FDI Rules Modified to Cover Participating Rights in Oil Fields
The Reserve Bank of India (RBI) has decided to treat the issue or transfer, to a non-resident, of participating rights or interests in oil fields as a foreign direct investment (FDI) transaction.
This means that transactions involving the issue or transfer of participating rights or interests in oil fields to a non-resident will have to be reported to the RBI as FDI transactions. But it also implies that other rules affecting FDI transactions would apply to such issues and transfers (e.g., rules affecting the price for the issue or transfer of the right or interest, payment terms and the manner of payment).
While 100% FDI in oil exploration is permitted without prior government approval, such FDI is subject to existing laws that regulate the oil marketing sector general and FDI in this area is also subject to the Indian Government's policies on private participation in oil exploration and on private participation in the discovered fields of national oil companies.
FDI in Pharmaceuticals—Implementation Update
Yesterday, the Department of Industrial Policy and Promotion in the Indian Government's Ministry of Commerce and Industry issued a press note changing the rules on foreign direct investment (FDI) in pharmaceuticals. Under the press note, FDI in existing pharmaceutical ventures will now require prior government approval, while FDI in new pharmaceutical ventures will not require government approval. The decision reversing the rules on FDI in pharmaceutical ventures will be reviewed in six months.
This press note effectively implements the decision taken by a high level ministerial group last month.
Time Reduced for Presentation of Cheques
In India, banks usually pay cheques and drafts if they are presented for payment within a period of six months from the date of the instrument.
The Reserve Bank of India (RBI) has expressed concerns that this practice is being abused because these instruments are being circulated in the market like cash for the six month period. As a result, the RBI has now revised the rules regarding the period within which cheques and other instruments have to be presented for payment.
Effective April 1, 2012, banks have been directed to not pay any cheques, drafts, pay orders or banker’s cheques if the instrument is presented more than three months after the date of the instrument.
Share Transfer Rules Liberalized
The Reserve Bank of India (RBI) has liberalized the rules that apply to certain types of share transfer transactions between persons resident in India and persons not resident in India.
Previously, RBI approval was required to make the following four types of share transfers: (i) share transfers between a non-resident and a resident that did not meet RBI specified pricing guidelines, (ii) share transfers from a resident to a non-resident that required prior approval from India's Foreign Investment Promotion Board (FIPB), (iii) share transfers from a resident to a non-resident that were subject to the takeover regulations issued by the Securities and Exchange Board of India (SEBI), and (iv) share transfers from a resident to a non-resident in respect of a company engaged in the financial sector.
Under the new rules, the RBI has dispensed with the requirement for RBI approval for these share transfers, if certain other conditions are met.
For example, in the case of share transfers that do not meet the RBI pricing guidelines, no RBI approval will be required for the transfer if the foreign shareholding is compliant with applicable rules on foreign direct investment, if the pricing meets any other applicable rules issue by SEBI, and an independent chartered accountant certifies compliance with the applicable SEBI rules. Similarly, for resident to non-resident transfers subject to FIPB approval, no RBI approval will be required if FIPB approval is obtained and the transfer complies with RBI pricing rules and documentation requirements; for resident to non-resident share transfer that are subject to the takeover regulations, RBI approval will not be needed if the transfer complies with RBI pricing rules and documentation requirements; and for resident to non-resident share transfers relating to the financial sector, prior RBI approval will not be required if the financial regulators of the transferor, the transferee and the investee companies do not object to the transfer and the no-objection certificates issued by such regulators are submitted to the RBI with other required transfer documentation.