Recommendations by Committee on Capital account convertibility

The committee's recommendations for a phased liberalization of controls on capital outflows and inflows over the three-year period, inter alia, include:

i) Indian Joint Ventures/Wholly-Owned Subsidiaries (JVs/WOSs) should be allowed to invest up to US $ 50 Million in ventures abroad at the level of the authorized dealers (ADs) in Phase I with transparent and comprehensive guidelines set out by the Reserve Bank. The existing requirement of repatriation of the amount of investment by way of divident, etc., within a period of 5 years may be removed. Furthermore, JVs/WOSs could be allowed to be set up by any party and not be restricted to only exporters/exchange earners.

ii) Exporters/exchange earners may be allowed 100 per cent retention of earnings in Exchange Earners Foreign Currency (EEFC) accounts with complete flexibility in operation of these accounts including cheque writing facility with Phase I

iii) Individual residents may be allowed to invest in assets and financial markets abroad up to US $ 25,000 in Phase I with progressive increase to US $ 50,000 in Phase II and US $ 1,00,000 in Phase III,. Similar limits may be allowed for non-residents out of their non-repatriable assets in India.

iv) SEBI registered Indian Investors may be allowed to set up funds for investments abroad subject to overall limits of US $ 500 million in Phase I, US $ 1 billion in Phase II and US $ 2 billion in Phase III.

v) Banks may be allowed more liberal limits in regard to borrowings from abroad and deployment of funds outside India. Borrowings (short and long-term) may be subject to an overall limit of 50 percent of unimpaired Tier I capital in Phase I, 75 percent in Phase II and 100 percent in Phase III with a sub-limit for short-term borrowing. In case of deployment of funds abroad, the requirement of section 25 of Banking Regulation Act and the prudential norms for open position and gap limits would apply.

vi) Foreign direct and portfolio investment and disinvestment should be governed by comprehensive and transparent guidelines, and prior Reserve Bank approval at various stages may be dispensed with subject to reporting by ADs. All non-residents may be treated on part for purposes of such investments.

vii) In order to develop and enable the integration of forex, money and securities markets, all participants in the spot market should be permitted to operate in the forward markets; FIIs, non-residents and non-resident banks may be allowed forward cover to the extent of their assets in Indial; all-India financial institutions (FIs) fulfilling requisite criteria should be allowed to become full fledged Ads; currency futures may be introduced with screen based trading and efficient settlement systems; participation in money market in Government securities the role of primary and satellite dealers should be increased; fiscal incentives should be provided for individuals investing in Government securities; the Government should set up its own Office of Public Debt.

viii) There is a strong case for liberating the overall policy regime on gold; banks and FIs fulfilling well defined criteria may be allowed to participate in gold markets in India and abroad and deal in gold products.

The Committee has also stated that the timing and sequencing of capital account convertibility would be greatly facilitated by the proposed changes in the legislative framework governing foreign exchange transactions.