Centre clips Reserve Bank of India powers on FDI

Till now, Section 6 of the Foreign Exchange Management Act (Fema) granted powers to the RBI to regulate, restrict or prohibit capital account transactions, in consultation with the Central government. Under this, the RBI had formulated various regulations to regulate capital account transactions, including the foreign exchange management.

However, the Finance Bill passed by Parliament shifted the power to regulate non-debt capital account transactions from RBI to the Centre. It has limited the power of RBI to only capital account transactions involving debt instruments.

The Bill has also deleted Section 6 (3), which empowered the RBI to prohibit, restrict or regulate transfer or issue of any foreign security by a person resident in India or person resident outside India. It also empowered RBI to regulate transfer of immovable property outside India and buy or transfer of immovable property in India.

Moreover, it will be the Central government which will now define what is the debt instrument. It is expected that the move will lead to simplification and acceleration to approvals for deals that are not debt financed.

The finance ministry will soon notify rules to implement the new mechanism. The move is likely to improve ease of doing business as the investors will not have to go to multiple regulators for approvals.

The measure is considered to be part of the government’s plans to make India an attractive destination for the FDI. It has liberalised FDI in number of sectors including defence, insurance and pension.

At present, the Indian currency is convertible only on current account, though some capital account transactions are also permitted. Full capital account convertibility means no restrictions on cross border movement of currency.

However, a senior RBI official said that it would be difficult to maintain capital controls for a long period of time as the Indian economy has become global. “Greater opening of capital account is inescapable as the Indian economy grows further and becomes global in dimension,” RBI executive director G. Padmanabhan said.

“So, India needs to continue moving towards full capital account convertibility. There is simply no escape from it. It is a moot question as to how fast the movement should be.”

“That will depend on how fast we can meet the most important preconditions like fiscal consolidation, inflation control, low level of bad debts, etc,” he said.