Mansukhlal Hiralal & Company | View firm profile
- Background
The Reserve Bank of India (RBI), through a press release dated 16 January 2025, introduced amendments to several regulations made under the Foreign Exchange Management Act 1999 (FEMA). These amendments aim to enhance the use of the Indian Rupee (INR) in cross-border transactions. This initiative is a significant step towards reducing dependency on foreign currencies and increasing the global acceptability of INR for trade and investment purposes.
- Amendments Brought In
The key changes introduced by the amendments include:
2.1. Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations 2019: Foreign investors can now use repatriable rupee accounts or foreign currency accounts for transactions, instead of earlier modes such as NRE, NRO, FCNR(B), or escrow accounts. This applies to transactions including the purchase/sale of equity instruments of Indian companies, investment/disinvestment in LLPs, purchase/sale of units of investment vehicles, and purchase/sale of convertible notes of startups.
2.2. Foreign Exchange Management (Deposit) Regulations, 2016: The amendments allow a Person Resident Outside India (PROI) to open a Special Non-Resident Rupee (SNRR) account with an Authorized Dealer (AD) Bank’s branch outside India, in addition to domestic branches. The restriction on the maximum tenure of SNRR accounts (previously capped at 7 years) has also been removed. Additionally, SNRR accounts may now be used for all permissible current and capital account transactions, including transactions among PROIs.
2.3. Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015: Indian exporters are now permitted to open and maintain foreign currency accounts with overseas banks for receiving full export value and advance payments, which may be used for imports into India or must be repatriated by the end of the next month.
- Brief Overview of the Effects of the Amendments
The amendments streamline foreign investment processes and promote ease of doing business by:
3.1. Expanding the flexibility of currency options for foreign investors.
3.2. Enhancing cross-border trade settlements in INR by enabling transactions through Special Rupee Vostro Accounts (SRVA) and SNRR accounts.
3.3. Strengthening India’s position in global financial markets by facilitating seamless INR transactions.
3.4. Providing exporters with greater autonomy in managing their foreign earnings, improving liquidity and operational efficiency.
3.5. Enabling units in International Financial Services Centres (IFSCs) to open SNRR accounts with AD banks in India for business-related transactions, thereby bolstering India’s financial infrastructure.
MHCO Comment:
These amendments represent a progressive step towards internationalizing the INR. By allowing broader use of INR in foreign transactions, India reduces reliance on hard currencies like the USD and EUR, mitigating exchange rate risks. Moreover, the regulatory simplifications make it easier for foreign investors to engage with Indian markets. However, the success of these changes will depend on global acceptance of INR and reciprocal arrangements with foreign trade partners. The removal of the SNRR account tenure cap and the expanded scope for transactions could improve liquidity and promote investment. However, further refinements may be needed to address practical challenges, such as liquidity management, foreign investor confidence in INR settlements, and compliance with global financial norms.
The amendments to FEMA regulations reflect India’s commitment to enhancing the global utility of INR and facilitating foreign investments. While this is a significant milestone, continued efforts are necessary to build confidence and establish INR as a preferred currency for international trade and investment. The long-term success of these measures will depend on sustained policy support, market confidence, and international collaboration.
Authored By: Mr Bhushan Shah, Partner, Ms Shreya Dalal, Associate Partner and Ms Veena Hari, Associate.
This article was released on 7 February 2025.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us for any assistance.