Explained: What RBI’s announcement to allow Indians to invest in International Finance Centres through LRS means

What is an IFSC?

A IFSC is a global financial centre that can be set up in any country. But the land on which it is set up, works technically like a foreign jurisdiction. India’s IFSC is set up in Gandhinagar in the state of Gujarat. An IFSC is set up typically to attract foreign capital to India and be made available to institutions, which would otherwise require the foreign entity setting shop here, run around for multiple permissions and be subjected to multiple regulations, all done in order to facilitate making investments in India.

An IFSC also helps domestic institutions raise money in foreign currency instead of going abroad. Says Rajiv Anand, Executive Director (Wholesale Banking) - Axis Bank: “Opening a Dollar deposit account for Indian residents has become much easier, albeit with restrictions on use.”

How does it help the retail investor?

Today’s RBI announcement will not translate to anything substantial, immediately.

RBI has clearly said that money remitted by individuals to the IFSC through the LRS must only be used for making investments. This means any institution that has opened shop at the IFSC can structure foreign currency products and sell them to the individual investor. To be sure, the way an IFSC’s jurisdiction is structured, even Indian firms and banks are foreign entities on IFSC land. For instance, a domestic bank can raise foreign currency for domestic companies from domestic investors. For the individual investor, this opens up the door for one more new financial instrument to invest in, as and when this happens.

To facilitate this, the RBI has allowed the opening up of foreign currency bank account at the IFC.

By restricting the LRS money to be used only for investment purposes, you will not be able to open just a foreign currency bank account and fund your expenses abroad. Typically, you open a foreign currency bank account abroad if you want to spend the money abroad. The LRS permission granted today is mainly targeted to help companies raise money in foreign currency. RBI has also said that your money must not lie idle for more than 15 days in your IFSC Bank account. Else, it would be remitted to you back. Swastik Nigam, Founder & CEO, Winvesta a fintech firm that allows Indians to invest abroad, says this could be a challenge. “This is definitely a step in the right direction. But we will have to see how the restrictions on the capital unfold and whether the objectives of GIFT City in attracting investments under LRS are met. The returning of funds within 15 days may be a tight provision, but can also spur a new set of investment opportunities,” he says.