India may allow foreign investors from specific countries to raise capital in rupees

Finance minister Nirmala Sitharaman (Courtesy: PTI photo)

The Centre plans to allow foreign investors from specific countries to raise capital in Indian rupees, in line with a Union Budget proposal to simplify foreign direct investment (FDI) norms to promote the use of the currency for overseas investments, a senior government official said.

"The idea is to allow a resident foreign investor, say from Sri Lanka, to raise capital in India in rupees for the purpose of using it for any investments in Sri Lanka itself. We will allow this only on a country-to-country basis and not across the board," the official said.

To be sure, the official cited Sri Lanka only as an example to explain the move under consideration.

This potential step is a part of India's overall aim to attract more foreign inflows by easing rules around FDI at a time when steeper interest rates in developed countries have led to investors preferring to invest abroad due to a higher opportunity cost.

“The rules and regulations for foreign direct investment and overseas investments will be simplified to facilitate foreign direct investments, nudge prioritisation, and promote opportunities for using Indian rupee as a currency for overseas investments,” Finance Minister Nirmala Sitharaman said in her Budget speech on July 23.

Shoring up forex reserves
These measures are also expected to arrest the fall in India's foreign inflows. Net FDI inflows to the country declined from $42.0 billion during FY23 to $26.5 billion in FY24.

"If somebody wants to borrow in the Indian market and invest abroad, not investment in financial assets. But if somebody wants to borrow in India and make an investment and set up, say, a manufacturing unit somewhere else, that should be facilitated," the official added.

Foreign investors from countries currently facing a currency shortage, especially of dollars, as well as those with a trade surplus with India will be preferred when it comes to allowing them to raise capital in rupees for investments in that resident nation, the official said.

This move, which is currently under discussion, will require changes to the Foreign Exchange Management Act (FEMA), the official said, adding that at present, only Indian investors are allowed to raise capital in rupees to invest abroad.

Streamlining FDI
The government has already taken steps to streamline FDI and Overseas Investment regulations.

According to changes to the Foreign Exchange Management (non-debt instruments) Rules, 2019, notified on August 16, the rules for cross-border share swaps were eased, allowing Indian companies to issue or transfer equity instruments in exchange for foreign company equity instruments.

Other amendments included allowing the issuance or transfer of Indian company equity instruments in exchange for foreign company equity instruments to facilitate global expansion of local firms through mergers, acquisitions and other strategic initiatives.