| Measures targeted at managing surging capital inflows. |
| The Reserve Bank of India (RBI) has recommended to the finance ministry a series of measures to curb investment flows from venture funds and into real estate. |
| These measures are expected to help check part of the huge inflows of foreign capital, particularly since the last week of July, and plug loopholes in foreign investment norms. |
| Among the recommendations, RBI has suggested restrictions on investments by venture capital funds in sectors that are already developed and booming. |
| The central bank has also suggested that FDI in real estate be brought under the approval route — such investment is currently under the automatic route. |
| The RBI has suggested that there should be end-use restrictions for investments by foreign venture capital funds. It has said that venture funds by definition should be investing in high-risk ventures in which entrepreneurs are unable to access capital and not in mature sectors like real estate. |
| It has also sought a time-frame within which companies have to allot shares to foreign entities after receiving advance payments. This is designed to curb a practice by Indian companies of using advance payments from foreign sources as loans and then returning the money. |
| Such transactions amount to overseas borrowings without restrictions. Overseas borrowings are currently locked in for a minimum of three years and the interest paid is capped at 150 basis points above the benchmark London Interbank Offered Rate (Libor) for borrowings of three years and above; and 250 basis points above Libor for borrowings of five years and more. |
| The RBI has also suggested a clear policy for investments by non-resident Indians (NRIs) in commercial real estate in India. |
| At present, NRIs are permitted to invest in two residential flats/apartments in India but there is no policy on their investment in commercial real estate. |
| Surging foreign investments have seen the country’s foreign exchange reserves swell over $50 billion to $251.33 billion in the first six months of 2007-08. |
| The purchase of foreign currency by the RBI to check rupee appreciation, which impacts exporter earnings, is leading to an infusion of rupee liquidity and has a high potential to fuel inflation. |
| The RBI has already taken several steps to absorb the excess liquidity, raising the cash reserve ratio (CRR) — the proportion of deposits banks must keep with the central bank — one percentage point this financial year. |
| It also recently raised the ceiling on government bond issues under its market stabilisation scheme (MSS) to Rs 2,00,000 crore from Rs 1,10,000 crore at the beginning of the year. |
Source: Business Standard