For the average Indian, capital account convertibility has arrived with the Reserve Bank of India finally notifying the liberalised remittance scheme, which allows individuals to send up to $25,000 overseas a year .
A statement issued by the central bank said that, under this facility, resident individuals will be free to acquire and hold immovable property or shares or any other asset outside India without prior RBI approval.
"Individuals will also be able to open, maintain and hold foreign currency accounts with a bank outside India for making remittances under the scheme without prior approval of RBI."
This account can be used for putting through all transactions arising from eligible remittances.
A "free remittance" facility was indicated by Finance Minister Jaswant Singh in the course of the mini-Budget announcements.
The good news is that this facility is in addition to those already available for private and business travel, gift remittances, donations, studies, medical treatment for which residents can remit sizeable amounts in foreign currency.
The only pre-condition is that this facility cannot be used for remittance for any transaction prohibited or restricted under the Foreign Exchange Management Act (Fema).
All that is required is that the applicant should furnish his income tax Permanent Account Number (PAN) and confirm to the bank that the funds being remitted are his own.
Banks have a bigger responsibility of carrying out the due diligence including complying with the know-your-customer norms as well as the anti-money laundering rules.
While there is no problem in remitting funds to the developed world, this facility cannot be used to send funds to countries identified by the financial action task force Financial Action Task Force (FATF), a global money-laundering watchdog set up by the Organisation for Economic Co-operation and Development (OECD), as a non-co-operative country.
The current list of non-co-operative countries includes Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Philippines and Ukraine. Besides these countries, RBI has also kept Bhutan, Nepal, Mauritius and Pakistan outside this facility.
Till now, capital account convertibility existed only for NRIs and FIIs. An NRI can open a foreign currency or a rupee bank account and freely sell its properties and securities in India to take back the money.
Similarly, a portfolio fund manager can enter the stock and bond market at any point and pull out whenever he feels. While all an Indian could do was park the dollar bills after a foreign travel in a zero-interest account.
Now, an Indian can do what an FII or NRI is allowed up to $25,000. This is capital account convertibility in a limited way, even though a full-fledged capital account convertibility could take years.
The announcement may be driven by the need to create a demand for the dollar, which is sliding against the rupee. However, it's a landmark in the exchange control liberalisation programme.
After the critical forex reserves position of May 1991 followed by a devaluation in July the same year, the country today has an over $100 billion forex kitty that has paved the way for such a remittance facility.
Foreign exchange liberalisation began with the "liberalised exchange rate management system" in 1992 and entry of FIIs in 1993.
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