In order to prevent misuse of funds belonging to foreign investors,the Reserve Bank of India has proposed that transfer of funds to the Indian entity should be allowed only through escrow mechanism.
The proposal comes against the backdrop of cases of misuse of such funds which are meant to purchase shares.
The issue was recently discussed at a high-level meeting presided over by department of economic affairs secretary Arvind Mayaram.
There have been cases of receipt of remittances for issuance of share capital and return of the investors money before the expiry of the 180 days without issuance of shares. This by passes the FDI/ECB guidelines, sources said. The RBI argued that the misuse can be checked if usage of money is allowed only after issuance of shares.
They said that the RBIs proposal would help in protecting the foreign investor as he becomes entitled for a say in the management only once the shares are issued.
As per the RBIs proposal,an Indian investee company would be required to open an escrow account with a bank rather than directly remitting to the account of investee company and funds shall be released by bank from this account in accordance with the terms of escrow arrangement.