RBI plugs loophole in forex management regulations

The Reserve Bank of India has detected and plugged a loophole in FEMA (Foreign Exchange Management Act) regulations which some Indian companies were exploiting to raise funds abroad and bring to India. The regulations are related to repayment of advances that are paid by overseas investors to Indian companies for allotment of shares under automatic FDI route. Under these regulations, while Indian companies are allowed to receive advance payment from NRIs and overseas investors, no time limit was stipulated for issue of shares or refund of the amount. Taking advantage of this loophole, companies instead of allotting shares use the advance money for other purposes and refund it after two to three years, giving some vague reasons. On Friday, through a circular to banks and authorised foreign exchange dealers, RBI has plugged this loophole, stipulating that companies receiving funds from abroad as advance payment for allotment of equity shares or debentures should issue the instruments to investors within 180 days.