In order to strategically invest in India, NRIs can invest in Indian Company through Foreign Direct Investment (FDI). A person resident outside India or an entity incorporated outside India (except for citizen of Pakistan and Bangladesh and entities in Pakistan and Bangladesh), can invest in India, subject to the FDI Policy of the Government of India.

Depending on the sector of the company, percentage limits upto which investment can be made in a particular sector have been stated in the FDI Policy. Further, FDI policy also states whether any approvals from RBI/FIPB/Other governmental authorities is required to be obtained or not i.e. FDI is allowed under automatic route (no permission) or government approval route.

FDI is prohibited in the following sectors:

(a) Lottery Business including Government/ private lottery, online lotteries, etc.
(b) Gambling and Betting including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
(h) Activities / sectors not open to private sector investment e.g. Atomic energy and Railway operations (other than permitted activities mentioned in the FDI Policy)

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Types of Instrument: Indian companies can issue equity shares, fully and mandatorily convertible debentures, fully and mandatorily convertible preference shares and warrants subject to the pricing guidelines / valuation norms and reporting requirements amongst other requirements as prescribed under FEMA Regulations.

The Indian company is required to issue the equity shares within 60 days from the date of receipt of consideration. If the shares are not issued within 60 days, the consideration should be refunded to the investor within 15 days from the completion of 60 days  

Compliances by Indian Company for FDI Investment:

-       Form Foreign Currency-Gross Provisional Return (FC-GPR): An Indian company issuing equity instruments to a person resident outside India and where such issue is reckoned as Foreign Direct Investment, defined under the rules, shall report such issue in Form FC-GPR, not later than thirty days from the date of issue of equity instruments.

-       Annual Return on Foreign Liabilities and Assets (FLA): An Indian Company which has received FDI, in the previous year including the current year, shall submit form FLA to the Reserve Bank on or before the 15th day of July of each year.

Transfer of shares by way of Sale/Gift: Transfer of shares should be in accordance with the prescribed guidelines under FEMA Regulations.

Further, one may have to evaluate if Form FC-TRS is required to be filed in case of transfer of shares as per the guidelines under FEMA Regulations. The onus of filing Form FC-TRS is of the resident transferor/transferee, as the case may be. Such Form is required to be filed within 60 days of transfer of equity instruments or receipt/remittance of funds, whichever is earlier. 

Remittance of sale proceeds: AD Bank can allow the remittance of sale proceeds of equity instruments (net of applicable taxes) directly outside India to the seller of shares resident outside India or NRE/FCNR(B) account. The sale of security has been made in accordance with the prescribed guidelines under FEMA Regulations.

                                                                                                                        - Updated 04/2024

A Liaison Office (LO) (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The  role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the  company and its products to the prospective Indian customers. It is not  allowed to undertake any business activity or commercial operation in India and cannot earn any income in India / raise invoices. The LO can neither borrow nor lend money. The Unique Identification Number (“UIN”)  is to be quoted in all references made to the RBI by the LO / designated AD.

LO can undertake the following activities in India:

• Representing in India the parent company / group companies.
• Promoting export / import from / to India.
• Promoting technical/financial collaborations between parent / group companies and companies in India.
• Acting as a communication channel between the parent company and Indian companies.

Eligibility:

The application in form FNC should be forwarded by the foreign entity through AD Bank to the RBI which will be considered by RBI under two routes:

• Automatic Route
• Approval Route: Applications from entities falling from NGO’s / NPO’s / Government Bodies / Departments are considered by RBI in consultation with the Ministry of Finance.

In addition, the following eligibility criteria are also considered by RBI:

• Profit making track record of the foreign entity in its home country for the preceding 3 FYs for LO.
• Net worth (paid up share capital + free reserves – intangible assets) of USD 50,000/- for LO as per the last audited Balance Sheet.

The approval of LO is valid for 3 years. After completion of 3 years, an application for renewal is required to be filed with the AD Bank for renewal of LO for another 3 years.    

Without prior permission of the Reserve Bank, no person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a LO in India.

Kindy refer FAQ for detailed comparison of Liaison Office, Branch Office and Project Office

                                                                                                                                                                                                               - Updated 04/2024

Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices (BO) in India with specific approval of the Reserve Bank. Such BO are permitted to represent the parent / group companies and undertake certain activities in India. However, retail trading activities or manufacturing / processing activities are not allowed for a BO. Reserve Bank of India considers the track record of the applicant company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinising the application. Profits earned by the BO are freely remittable from India, subject to payment of applicable taxes.

A BO can undertake the following activities in India:

• Export / Import of goods.
• Rendering professional or consultancy services.
• Carrying out research work, in areas in which the parent company is engaged.
• Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
• Representing the parent company in India and acting as buying / selling agent in India.
• Rendering services in information technology and development of software in India.
• Rendering technical support to the products supplied by parent / group companies.
• Foreign airline / shipping company.

Eligibility:

The application in form FNC should be forwarded by the foreign entity through a designated AD Bank to RBI which will be considered by RBI under two routes:

• Automatic Route 
• Approval Route: Applications from entities falling from NGO’s / NPO’s / Government Bodies / Departments are considered by RBI in consultation with the Ministry of 

• Profit making track record of the foreign entity in its home country for the preceding 5 FYs for BO.
• Net worth (paid up share capital + free reserves – intangible assets) of USD 1,00,000/- for BO as per the last audited Balance Sheet.

The approval of BO is valid for 3 years. After completion of 3 years, an application for renewal is required to be filed with the AD Bank for renewal of BO for another 3 year

Without prior permission of the Reserve Bank, no person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a BO in India.

Kindy refer FAQ for detailed comparison of Liaison Office, Branch Office and Project Office

                                                                                                                                                                                                                      - Updated 04/2024

A Project Office (PO) means a place of business established to represent the interests of a foreign company executing a project in India. Such offices are prohibited from undertaking or carrying on any activity other than the activity relating to the execution of the project for which such office is established.

Eligibility:

Reserve Bank has granted general permission to foreign companies to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India, and

• the project is funded directly by inward remittance from abroad; or
• the project is funded by a bilateral or multilateral International Financing Agency; or
• the project has been cleared by an appropriate authority; or
• a company or entity in India awarding the contract has been granted Term Loan by a PFI or a Bank in India for the project.

However, if the above criteria’s are not met, the foreign entity has to approach the RBI, Central Office, for special approval.

Setting up of PO by foreign NGO / NPO / Foreign Government Bodies / Departments are under the Government Route. Such entities are required to apply to RBI for prior permission to establish an office in India.

Validity: Generally, the approval is valid till completion of the project. 

Without prior permission of the Reserve Bank, no person being a citizen of/ registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a PO in India.

The Government of India, through the Securities and Exchange Board of India (‘SEBI’), has been taking measures to liberalise and boost foreign investment into India by Foreign Portfolio Investors through simplified operational and compliance requirements.

Foreign Portfolio Investment entails offshore investors buying into Indian financial assets. All the investments are passively held by the investors. The different types of securities into which such investment is funneled include but are not limited to stocks, bonds, and other financial assets.

There are three main agents in the chain of an FPI fund, which are briefly discussed below:

·         Foreign Portfolio Investor – A person who has been granted certification by the Securities Exchange Board of India (SEBI) authorizing him to buy, sell, or otherwise deal in securities in India. This certificate is issued by a Designated Depository Participant on behalf of SEBI.

·         Designated Depository Participant – This entity acts as an intermediary between the Foreign Portfolio Investor and the FPI Fund, acting as a custodian to the investments made by the Foreign Portfolio Investor in the securities operative under the FPI fund.

·         Foreign Portfolio Investment fund – Such funds are floated to provide investment options that are beyond the domestic securities network to diversify the investment portfolio. 

Can NRIs register as FPI?

NRI’s/OCIs in individual capacity are not permitted to apply for FPI Registration. However, an NRI control offshore entity/fund may apply for such registration provided shareholding of NRI in such offshore entity should not be more than 25% (individually) and 50% (aggregate).

Considering the complexity involved and regulatory changes introduced from time to time, it is advised to seek help and guidance in advance from a professional or a broker who assist in setting up FPIs.   

Categories of FPI:

The SEBI (FPI) Regulations of 2019 further provide the categorization of FPIs, under which the Foreign Portfolio Investor can apply for registration. The two categories are as follows:

1. Category I is an exhaustive category that includes the following:

o    Government and government-related investors such as central banks, sovereign wealth funds, international or multilateral organizations; entities controlled or at least 75% directly or indirectly owned by such Government and Government related investor(s)

o    Pension funds and university funds

o    Appropriately regulated entities such as insurance or reinsurance entities, banks, asset management companies, Investment Managers (‘IMs’), investment advisors, portfolio managers, broker-dealers, and swap dealers

o    Entities from the Financial Action Task Force (‘FATF’) member countries, or from any country specified by the Central Government by an order or by way of an agreement or treaty with other sovereign Governments, which are: - appropriately regulated funds - unregulated funds whose IM is appropriately regulated and registered as a Category I FPI - university related endowment funds of universities that are in existence for more than five years

o    An entity whose IM is from a FATF member country, and such IM is registered as a Category I FPI; or an entity which is at least 75% owned, directly or indirectly, by another entity, eligible under the heads above and from a FATF member country. 

2. Category II includes registration for investors who are not eligible under Category I, such as:

o    Endowments and foundations

o    Charitable organizations

o    Corporate bodies

o    Family offices Individuals

o    Appropriately regulated entities investing on behalf of their client, subject to prescribed conditions

o    Unregulated funds in the form of limited partnerships and trusts 

Difference between Investment under FDI vs. FPI

In simple terms, a foreign direct investment (FDI) is an investment made by foreign person/entity of one country directly into the business interests i.e. Company or LLP located in another country. On the other hand, foreign portfolio investment (FPI) refers to investments made in different kinds of securities and financial assets like shares, bonds etc. issued in another country.

Limit of Investment prescribed under FEMA:

Schedule II to FEM (Non-Debt Instruments) Rules, 2019 “hereinafter referred as NDI Rules” prescribes the permissible limit of investment by Foreign Portfolio Investors (‘FPI’), individually and in aggregate, in an Indian company as under:

Compliances under the Income-tax Act, 1961:

FPIs may be required to comply with below compliances under the Indian tax laws:

1.    Obtain PAN in India

2.    Advance Tax Computation, if applicable (Quarterly compliance).

3.    File Return of Income in India (annual compliance), subject to any relief under Double Tax Avoidance Agreement between India and resident country of FPI

4.    Obtain remittance certificate (i.e., Form 15CA /CB) from a Chartered Accountant for repatriation of funds

Repatriation of sale proceeds by FPI:

The sale proceeds are freely repatriable for investments made by FPIs, subject to payment of applicable taxes in India and fulfillment of compliances for repatriation.

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:

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:  

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.

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.   

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

Introduction:

NRIs are the “Non-Resident Indians”, whose contribution to the economy and growth of India has always been highly valued by the Government. Realising the value of their contributions, the Government of India has permitted the NRI’s to make investments in Indian business in the form of Limited Liability Partnership (“LLP”), Proprietary concern or Partnership Firm.

Investments by NRI’s in “LLP, Proprietary concern or Firm” are governed by the provisions of Foreign Exchange Management Act (“FEMA”) read with relevant rules on “Non-Debt Instrument Foreign Exchange Management (Non-debt Instruments) Rules, 2019” (“NDI Rules,2019”).

Here in this article, we will cover the provisions with respect to investments by NRI’s in LLP, Proprietary concern, Firm, the conditions subject to which investments can be made and limitations, if any, on investments. 

A.   Limited Liability Partnership (“LLP”)   

Limited Liability Partnership (“LLP”) means “a partnership formed and registered under the Limited Liability Partnership Act, 2008”. In India, LLP form of organization is growing rapidly owing to the flexibility in its structure and operation.

NRI’s or OCI’s are permitted to make investments in LLP in India in accordance with the extant NDI Rules, 2019. As per the said Rules, investments in LLP can be made on repatriation or non-repatriation basis. Further, Companies, Trust and Partnership Firms which are owned and controlled by NRI’s or OCI’s are also allowed to invest on non-repatriation basis. Specific conditions as prescribed in the said Rules with respect to investments in LLP are as under:

1.    Investments on non-repatriation basis:

We have highlighted below the key provisions to be considered were investments are made on a non-repatriation basis: 

Note 1: However, it is observed that, various banks in past have allowed repatriation of such proceeds under USD 1 million scheme. Hence, it is advisable to seek professional advise and Bank’s guidance before undertaking any transaction related to investment in LLP.

2.    Investments on repatriation basis:

Foreign investments in LLP can be made on repatriation basis, subject to the following conditions: 

a.  Investments in LLP can be made either by way of capital contribution or by way of acquisition or transfer of profit share of LLP

b.  Foreign investment is permitted under the automatic route in LLPs operating in sectors/ activities where 100% Foreign Direct Investment (FDI) is allowed, through the automatic route and there are no FDI linked performance conditions.

c.  Foreign Investment in LLP is subject to the compliance of LLP Act, 2008.

d.  Pricing guidelines norms - The price at which investment is made in an LLP should not be less than the fair price worked out as per any valuation norm which is internationally accepted or adopted as per market practice. Further, a valuation certificate to this effect shall be issued by the Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.

e.  In case of transfer of capital contribution or profit share from a person resident in India to a person resident outside India, the transfer should not be for consideration less than the fair price of capital contribution or profit share of LLP.  Further, in case of transfer of capital contribution or profit share from a person resident outside India to a person resident in India, the transfer should not be for consideration more than the fair price of capital contribution or profit share of LLP.

f.  The amount of consideration should be paid by way of inward remittance from abroad through banking channels out of funds held in NRE/FCNR(B)/NRO Account maintained in accordance with the FEMA Regulation. 

B.   Investments in Partnership Firm/ Proprietary Concern:

NRI’s or OCI’s are allowed to make investments in the capital of partnership firm or a proprietary concern in India subject to the condition that such investment can be made only a on “non -repatriation basis”. Further, such investments are subject to the below mentioned key provisions: 

a.   The firm or proprietary concern should not be engaged in any of the following activities:

·         Agricultural/plantation; or

·         Print media; or

·         Real estate business.  

Note: In general, “Real estate” means buying and selling of property but does not include development of townships, construction of residential/ commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations, 2014.

Disclaimer: It is always advisable to take a professional help before making any investments in real estate business activity.

b.  The amount of consideration should be paid as inward remittance from abroad through banking channels or out of funds held in NRE/ FCNR(B)/ NRO account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

c.   The disinvestment proceeds shall be credited only to the NRO account of the person concerned, irrespective of the type of account from which the consideration was paid.

 d.  The amount invested for contribution to the capital of a firm, or a proprietary concern and the capital appreciation thereon shall not be allowed to be repatriated abroad. However, it is observed that, various banks in past have allowed repatriation of such proceeds under USD 1 million scheme. Hence, it is advisable to seek professional advise and Bank’s guidance before undertaking any transaction related to investment in proprietary concern or firm.

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 Indian business. The above guiding provisions will help the NRI in deciding their investment plan in India which will ultimately result in the economic growth of the country.

RBI permission: Additionally, one may also note that, investments by NRI’s or OCI’s in LLP, proprietorship and partnership firm in any other manner other than above, will require prior approval of RBI.  

                                                                                                                                                                                                             - Updated 04/2024