This article is written by Rushab Dhandokia. Rushab is an associate with a law firm based in Ahmedabad. He specialises in advising startups on their legal queries and can be reached at [email protected].
Introduction
The Modi government has off-late taken various policy measures and undertaken numerous regulatory changes to walk its talk with respect to various propositions it has made in order to fuel growth to the economy. The government understands that clearing fundamental regulatory intricacies is paramount to get the economy straight and encourage foreign investors to invest in India. In order to reflect this intention of the government, the cabinet recently approved amendment to the definition of Non Resident Indians (NRIs) to include Overseas Citizens of India (OCIs) cardholders and Persons of Indian Origin (PIO) cardholders for FDI purposes. Also in the same approval the cabinet agreed to approve investments made by NRIs on non- repatriation basis to henceforth be considered as domestic investments. This is a major regulatory reform the implications of which are elaborated in detail below.
Cabinet Approval and DIPP Amendments
The Cabinet in its May 21, 2015 approval[1] basically approved two relevant amendments to the FDI Policy which were later in print brought into force by the Department of Industrial Policy & Promotion (DIPP) vide its Press Note No. 7 of 2015[2].
The First amendment that was approved by the cabinet and brought into force by DIPP relates to amending the definition of NRI as defined in the FDI policy in order to align it with the definition of NRI as defined in the Citizenship Act which was amended early this year.
Before the said amendment was brought into force, the term ‘NRIs’ from the perspective of exchange control regulations governing FDI referred to an NRI who is a citizen of India or is a PIO, and the term PIO covered individuals who held an Indian passport in the past or who are children or grandchildren of an individual who was a citizen of India (after the Constitution of India came into force) or who is a spouse of an Indian citizen or a PIO.
However, early this year, in January 2015, the Citizenship Act, 1955 was amended replacing the concept of registration as a PIO cardholder with the concept of registration as an OCI cardholder. The category of individuals entitled to apply for registration as OCI cardholder are similar compared to those who were entitled to apply for registration as a PIO cardholder.
Therefore, in order to bring parity in the definition of NRI with the amended definition of the Citizenship Act, the DIPP Press Note reads as follows:
“‘Non-Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7(A) of the Citizenship Act, 1955. ‘Persons of Indian Origin’ cardholders registered as such under Notification No. 26011/4/98 F.I, dated 19.8.2002, issued by the Central Government are deemed to be ‘Overseas Citizen of India’ cardholders.
Pursuant to the said amendment, the definition of NRIs’ from the perspective of FDI would cover non-residents who are either Indian citizens or OCI cardholders. Individuals who have registered as PIO cardholders under the erstwhile Issuance of PIO Card Scheme, 2002 would be deemed to be OCI cardholders.
The amendment would bring in consistency between exchange control regulations and the Citizenship Act, thereby aligning the definition of NRI under the two laws. The change in definition would apply to a broad range of transaction by NRIs, particularly, investment in Indian companies, partnerships and proprietary concerns, lending to Indian companies in INR and acquisition of immovable property in India.
The Second amendment that was approved by the cabinet and brought into force by DIPP by amending the relevant clause in the FDI Policy is an important one which states that investments by NRIs on non- repatriation basis would be considered as domestic investments. Under the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (TISPRO Regulations), investment by NRIs on non-repatriation basis is dealt with separately under Schedule 4. This schedule specifically categorizes investments by NRIs as foreign investments whether on repatriation basis or on non- repatriation basis. However, to ease the law and encourage foreign investments, the amendment seeks to increase foreign investments on non- repatriation basis by NRIs as domestic investments.
The language of the amendment reads as follows:
Investment by NIRs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents.
As a result of this amendment all the restrictions relating to investment by NRIs from FDI perspective- specifically being sectorial caps, pricing guidelines, cap on coupon rate etc. which otherwise were applicable in case of regular FDI investment in India by NRIs would henceforth not be applicable in case of NRIs investing on non-repatriation basis.
Thus, the direct implication of this amendment is that investments by NRIs on non- repatriation basis are immune from all sorts of FDI restrictions, which thereby would give comfort and encourage NRIs to invest in India on non- repatriation basis. The other direct implication of this amendment from FDI perspective is that while determining whether an Indian company is a foreign owned company with 50% or more shareholding held by non-residents, investment by NRIs on non-repatriation basis would not be included. Therefore, from the perspective of downstream investment in companies engaged in sectors subject to sectorial caps or specific conditions existing limitations would not apply in case of investment by NRIs on non-repatriation basis.
Conclusion
The amendments discussed above are aimed at bringing certainty in treatment of NRI investments. The decision that NRI would now on include OCI cardholders as well as PIO cardholders would align the FDI policy. This thereby would meet one of the proposed policy of the government which is to provide PIOs and OCIs parity with NRIs in respect of economic, financial and educational fields.
Also the amendment to the effect that NRI investment under Schedule 4 of TISPRO Regulations i.e. on non-repatriation basis would from now on be deemed to mean domestic investment made by residents, would provide clarity in the FDI policy as discussed above. The said amendments would boost foreign investments across sectors and accelerate the inflow of foreign exchange remittance which would have positive implications on the economic growth of the country.
[1] http://pib.nic.in/newsite/PrintRelease.aspx?relid=121914
[2] http://dipp.nic.in/English/acts_rules/Press_Notes/pn7_2015.pdf
