HNIs more cautious on foreign investment after new rules kick in

High net individuals (HNIs) can no longer sidestep the rules and regulations to trade in stocks, cryptocurrency and derivatives abroad. With the new rules and regulations, they are now required to be more careful with foreign investments, according to a report by Economic Times (ET).

According to the new rules of the Liberalised Remittance System (LRS), an Indian resident can now invest $250,000 a year in foreign stocks, debt etc. It is regulated by the Reserve Bank of India (RBI). Till now, a person could invest only 10 per cent in a foreign unlisted company. 

Investment in cryptocurrencies and financial derivatives abroad is banned under the LRS. 

"The reason for this change seems to be to discourage accumulation and flight of uninvested Indian capital outside the country, which could also then remain untracked, and be used for purposes not intended under the LRS," Parul Jain, head of international tax and fund formation practices at Nishith Desai Associates was quoted as saying by ET.

The new rules also prohibit HNIs from investing in foreign fixed deposits (FDs) as they come under unlisted debts. 

However, in the light of new checks and balances, as long as the resident individual does not have control over the operating foreign entity, such a foreign entity is now permitted to expand by having a subsidiary as well as a step-down subsidiary, which was earlier prohibited under LRS. This seems logical," said Tejesh Chitlangi, senior partner at IC Universal Legal, as reported by ET. 

Experts say this comes at a time when the currency and stock markets have been highly volatile on the belief that the US interest rates could rise further in the coming months. In 2013, the LRS limit was reduced to $75,000 per year to boost the Indian rupee. However, when the stability was achieved in 2014, the limit was raised to $125,000. Originally, the limit stood at $25,000 when the scheme was launched in 2006.