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Overseas investment

To assess the impact of overseas operations of regulated Indian entities in the financial sector, the Reserve Bank of India has extended its regulations covering Indian entities seeking to make investments overseas to entities engaged in any activity, not just financial sector activities.

Regulation 7 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations 2004 regulated Indian financial services entities that sought to invest in entities engaged in the financial sector overseas. They were required to:

  • be registered with the appropriate regulatory authority in India to conduct the financial sector activities;
  • have earned net profit during the preceding three financial years from those activities;
  • have obtained approval for investment in financial services activities overseas from the concerned regulatory authorities in India and overseas; and
  • have fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

Regulated entities engaged in financial service activities in India that were investing in non-financial service activities overseas were not required to comply with these conditions.

Under a new Notification issued on September 6 2006, it was clarified that trading in overseas commodity exchanges and the establishment of joint ventures/wholly owned subsidiaries for the purpose of trading in commodity exchanges overseas would be regarded as financial services activities for which regulatory clearances would have to be obtained from the Forward Markets Commission. So Indian entities wishing to set up joint ventures or wholly owned subsidiaries overseas to trade in overseas commodities exchanges must approach the Commission for regulatory clearance as per guidelines.

Shardul J Thacker

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