Introduction/General Overview:
Non-resident Indians (“NRI”) are a group of people who, despite being settled overseas, play a key role in the economic development of our country. Realising the value of their contributions, the Government of India has permitted NRI’s to make investments in India (equity investments as well as debt investments) in various kind of securities such as shares, mutual funds, debentures, bonds etc.
Such investments in securities by NRI’s or OCI’s are governed by specific regulations under Foreign Exchange Management Act (“FEMA”) as under:
Category of Instrument | Relevant Foreign Exchange Regulation |
Equity Instrument | Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules,2019”) |
Debt Instrument | Foreign Exchange Management (Debt Instruments) Regulations, 2019 (“DI Regulation, 2019”) |
In this article, we would be covering key provisions under the extant Rules and Regulations in respect of investments by NRI’s or OCI’s in shares (equity as well as preference), mutual funds and other securities. The same is discussed as under:
Part A: Investment by NRI’s or OCI’s in shares of an Indian Company:
NRI’s or OCI’s are allowed to invest in shares1 of an Indian company on repatriation as well as non-repatriation basis. The same is discussed as mentioned below:
Sr. No. | Manner of Investment | Shares in which investment is allowed. |
1 | On Repatriation Basis: | |
| a. Under Foreign Direct Investment Route | Unlisted shares |
| b. Through NRE (PIS) Route | Listed shares |
2 | On Non-Repatriation Basis | Listed and unlisted shares |
1Shares include equity shares, compulsorily convertible debentures, compulsorily convertible preference shares and share warrants issued by an Indian Company
However, the above investment shall be subject to fulfilment of conditions and compliances as prescribed under the extant Rules.
Particulars | Investments on repatriation basis – FDI Route | Investments on repatriation basis – NRE(PIS) Route | Investments on non-repatriation basis |
Rules governing such investments | Governed by Schedule I of NDI Rules, 2019 | Governed by Schedule III of NDI Rules, 2019 | Governed by Schedule IV of NDI Rules, 2019. |
Category of investments | · Such investments are deemed as “foreign investments”. · Restrictions in relation to sectoral cap, entry routes, pricing guidelines, minimum capitalisation, FDI compliances etc to apply. | Such investments are considered as foreign investment | · Such investments are deemed “at par with domestic investments”. · Restrictions with respect to cap limit, pricing guidelines etc will not apply. |
Special provisions with respect to cap limit on investments | One needs to evaluate the permissibility of investment under automatic route or approval route depending on the activity/sector in which the Indian company is engaged. Further, cap limit on investment will also apply depending on the activity/sector in which the Indian company is engaged. Automatic Route does not require prior approval of RBI or Central Government unlike approval route where prior approval of Government is required | 1. Individual holding of an NRI – Upto 5% of the total paid- up equity capital on fully diluted basis or paid-up value of each series of debentures/ preference shares/share warrants issued by the Indian Company. 2. Aggregate holding of all NRI’s - Upto 10% of the total paid-up equity capital of the company on a fully diluted basis or paid-up value of each series of debentures/preference shares/ share warrants issued by the Indian company Note: The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company passes a special resolution to that effect. | No limit on investments |
Prohibited Sectors/ business activity | 1. Lottery business including Government or Private Lottery, online lotteries etc.; 2. Gambling and betting including casinos. 3. Chit Funds; 4. Nidhi Company; 5. Trading in Transferable Development Rights; and 6. Real Estate business or construction of farm houses. | No sector restriction specified under the relevant Schedule. However, in our view, sector restriction as laid for FDI route would apply in even when investments are made through NRE(PIS) route. | 1. Nidhi Company; 2. Company engaged in agriculture or plantation activity; 3. Real Estate business or construction of farm houses. 4. Dealing in Transfer of development Rights |
Mode of payment | Consideration should be paid through inward remittance from abroad (through banking channels) or from NRE/FCNR(B) or Escrow Account. | Consideration should be paid through inward remittance from abroad (through banking channels) or from NRE Account. The NRE account will be designated as an NRE (PIS) Account, and the designated account shall be used exclusively for this purpose. | Consideration should be paid through inward remittance from abroad (through banking channels) or out of funds held in NRE /FCNR(B)/NRO Account. |
Remittance of sale proceeds | The sale proceeds (net of taxes) of equity instruments may be remitted outside India or may be credited to NRE/FCNR(B) account of the person concerned. | The sale proceeds (net of taxes) of equity instruments may be remitted outside India or may be credited to NRE (PIS) account of the person concerned. | The sale/maturity proceeds (net of applicable taxes) of equity instruments or units shall be credited only to the NRO account of the investor, irrespective of the type of account from which the consideration was paid. Recently Banks have places restriction on repatriation of such sale proceeds from NRO account. Earlier the sale proceeds were considered by the Bank as repatriable under One Million Scheme. |
Compliance requirement | 1. Reporting for issue of shares: · Filing of Form FC-GPR - Indian Company is required to e- file Form FC-GPR for issue of shares. Such Form is required to be filed within a period of 30 days from the date of issue. · Issue of shares – Shares are required to be issued within a period of 60 days from the date of receipt of all consideration. 2. Annual Return on Foreign Liabilities and Assets (“FLA Return”)– Indian Company receiving foreign investments is required to file FLA Return with the RBI. Such Form is required to be filed on or before 15 July every year. | No compliance requirement by the NRI investor. | No compliance requirement by the NRI investor. |
Part B: Investment in Mutual Funds:
ü NRI’s or OCI’s are allowed to invest in units of domestic mutual funds.
ü Investments in mutual funds could be both – equity oriented as well as debt oriented.
ü Mutual funds units which invest >50% in equity are classified as “equity oriented Mutual Funds”. Similarly, mutual funds units which invest <= 50% in equity are classified as “debt oriented mutual funds”.
ü NRI’s are allowed to invest on repatriation and well as non-repatriation basis both in respect of equity oriented mutual funds and debt oriented mutual funds.
ü There are no restrictions on investment even with respect to cap limit.
ü Provisions with respect to mode of payment and remittance of sale proceeds:
A. Where investments are made on repatriation basis:
a) Payment for purchase consideration should be paid either through:
· inward remittance from abroad (through banking channels); or
· NRE Account; or
· FCNR(B) account.
b) Remittance of sale proceeds: The sale proceeds (net of taxes) of units of mutual funds may be remitted outside India or may be credited to NRE (PIS)/FCNR(B)/NRO account of the person concerned at the option of the NRI/OCI investor.
B. Where investments are made on repatriation basis:
a) Where investments are made on non-repatriation basis:
Purchase consideration should be paid as:
· inward remittance from abroad (through banking channels); or
· NRE/FCNR(B) Account; or
· NRO Account.
b) Remittance of sale proceeds: The sale/maturity proceeds (net of applicable taxes) of units shall be credited only to the NRO account of the investor, irrespective of the type of account from which the consideration was paid.
Part C: Investment by NRI’s or OCI’s in various other securities:
Apart from above, NRI’s or OCI’s are also allowed to invest in various other kind of securities (both equity as well as debt) such as bonds issued by the government, non-convertible debentures/ preference shares etc. subject to terms and conditions specified therein.
For ease of reference, based on our understanding, we have tabulated below the list of some of the other securities in which investments can be made and the conditions attached it to.
Sr. No | Nature of instrument | Repatriation basis | Non-repatriation basis | Any specific conditions |
1. | Shares in Public Sector Enterprise | ü Schedule III of NDI Rules, 2019 | X | · Purchase should be in accordance with the terms and conditions stipulated in the notice inviting bids. · No ceiling limit on investment. |
2 | Subscribe to National Pension System | ü Schedule III of NDI Rules, 2019 | X | · Investment is made in accordance with the provisions of Pension Fund Regulatory and Development Authority (PFRDA). |
3 | Infrastructure investment trust (INVITs) (listed and unlisted) | ü Schedule VIII of NDI Rules, 2019 | ü Schedule IV of NDI Rules, 2019 | · Investments can be made both through repatriation and non-repatriation basis. · Investments made on non-repatriation basis are deemed at par with domestic investments. |
4 | Real Estate Investment Trust (REITs) (listed and unlisted) | ü Schedule VIII of NDI Rules, 2019 | ü Schedule IV of NDI Rules, 2019 | Same as 3 above. |
5 | Alternate Investment Funds (AIFs) (listed and unlisted) | ü Schedule VIII of NDI Rules, 2019 | ü Schedule IV of NDI Rules, 2019 | Same as 3 above. |
6 | Convertible Notes issued by a Startup Company | X | ü Schedule IV of NDI Rules, 2019 | No restrictions. |
7 | Government dated securities (other than bearer securities) | ü Schedule I of DI Regulation, 2019 | ü Schedule I of DI Regulation, 2019 | No restrictions. |
8 | Treasury bills |
9 | Exchange-Traded Funds (ETFs) which invest less than or equal to 50% in equity |
10 | Bonds issued by a Public Sector Undertaking (PSU) in India | ü Schedule I of DI Regulation, 2019 | X | No restrictions. |
11 | Bonds issued by Infrastructure Debt Funds | ü Schedule I of DI Regulation, 2019 | X | No restrictions. |
12 | Listed non-convertible/ redeemable preference shares or debentures issued under merger, demerger or amalgamation scheme | ü Schedule I of DI Regulation, 2019 | ü Schedule I of DI Regulation, 2019 | No restrictions. |
13 | Debt instruments issued by banks, eligible for inclusion in regulatory capital. | ü Schedule I of DI Regulation, 2019 | X | No restrictions. |
14 | Subscribe to the chit funds authorised by the Registrar of Chits or an officer authorised by the State Government in this behalf | X | ü Schedule I of DI Regulation, 2019 | No restrictions. |
15 | National Plan/ Saving Certificates | X | ü Schedule I of DI Regulation, 2019 | No restrictions. |
Transfer of equity instruments by NRI:
NRI’s are allowed to transfer the equity instruments held by them either on repatriable or non-repatriable basis to a person resident outside India. However, such transfer is subject to the conditions and guidelines mentioned in the FEMA Regulation.
Further, certain compliances are also required transfer of equity instruments between Resident and Non-Resident, as specified in the Regulation
Conclusion:
In light of the above, it can be observed that the Government of India has provided a far stretched benefit to NRI’s for making investments in India. Based on the above guiding provisions the NRI’s can decide about their investment plan in Indi and it is always important to seek professional advice before investing in India.
- Updated 05/2024