India’s lawyers expect a central bank decision to
liberalise the country’s foreign direct investment
(FDI) policy to promote further easing of financial sector
The Reserve Bank of India (RBI) last week revealed plans to
ease FDI procedures by amending its foreign exchange management
regulations. The proposed revisions will remove the need for
RBI approval on the transfer of shares between non-resident and
domestic investors in several key areas including the financial
RBI permission has also been removed for the transfer of
shares where the Foreign Investment Approval Board (FIPB) has
already given its clearances and the Securities and Exchange
Board of India guidelines have been adhered to.
The move aims to entice global investors onshore. But it
should also benefit the entire financial services sector,
including the non-banking finance companies.
Kotak Mahindra Capital’s Ajay Vaidya said the
proposed amendments were exceptionally logical and had been
welcomed by market participants.
"By removing one layer of approval, these measures ensure
faster execution and ease of investing," he said. "This will
promote operational simplicity."
The move did not, however, represent any broader change of
policy, he explained. It followed a 2004 ruling by the FIPB
which enabled the transfer of shares between residents and
non-residents to happen automatically without prior FIPB
"The RBI has now ruled it should follow FIPB’s
2004 decision," said Vaidya. "And rightly so; if a share
transfer is allowed by one regulator then the RBI should
automatically permit it."
He added he would not be surprised if more policy
liberalisations followed. Pending insurance and banking bills
would be obvious vehicles for India’s regulators
to introduce further reform, he said.
"The regulators want to keep the momentum going," he said.
"But they will first need to look at the bigger picture and
reach an agreement with regards to certain policy decisions,
such as capping bank voting restrictions at 10%."
"Once an agreement is reached on such policy decisions, it
will further encourage the process of liberalising both
sectors," he said.
But S&R Associates’ founding partner,
Sandip Bhagat said further liberalisation was still very much a
work in progress.
Indian corporates would be behind such a move in the banking
sector, he said, as it would enable them to more-easily gain a
banking license. An easing of regulations governing the
insurance sector was also something a number of market
participants had been calling for, he said. But he believed a
relaxation of rules in either sector was more a hope than a
"There currently is a give and take happening between the
RBI, the government and the corporate sector," he said. "But I
am bit more reserved with regards to the likelihood of further
"It is equally possible the RBI goes in the opposite
direction and introduces stricter policies," he said.