This article is written by Tanya Gupta, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Introduction

In the World Bank’s ease, India climbed 23 points by doing business index to 77th place and becoming a top-ranked country in South Asia for the first time and third among BRICS. Historically in India investment climates have never been so attractive. Easing the business process, removal of red tape and establishing a domestic consumer market are the efforts done by the government which all combine to give handsome returns on Non-Resident India’s investment. Various steps are taken to promote investment by Indians living abroad in India by the government of India. It has been taken up as a priority to promote investments by advising prospective investors including Non-Resident Indians on investment climate opportunities policies and producers. The government is now focusing on the Indians who live in foreign countries and their ability by investing in India and the Indian economy as India becomes the global community to invest.

What does NRI really mean? 

Before we move to the technicalities of the topic let us first understand who are NRIs? There is a lot of confusion about who is an NRI? Non-Resident Indians are specifically defined in two major laws in India that is the Income Tax Act 1961, and Foreign Exchange Management Act 1999. In the Income Tax Act, the NRI is determined on the basis of the number of days the person resides abroad. In Foreign Exchange Management Act the NRI is determined upon the intention of that person to reside abroad.  

According to the Income Tax Act, 1961

Non-Resident India is an individual who is not a resident of India yet a citizen of India or a person of Indian origin. Therefore, in order to figure out whether an individual is a Non-Resident Indian or not, under Section 6 of the Income Tax Act, his residential status is required to be determined.

An individual is said to be a non-resident in India if he is not a resident in India according to Section 6 of the Income Tax Act, 1961.

If an individual satisfies any of the following then he is deemed to be a resident in India in any previous year;

• If an individual resides in India for a period of 182 days or more during the previous year or,
• If he resides in India for 60 days or more during the previous year and 365 days or more during 4 years immediately preceding that year.

For example; Mr. Shah went to Canada for her graduation of three years from a reputed university. While studying his professor suggested doing a post-graduation course from the same university Upon the completion of the course the company offered him a permanent position. She worked there for the past four years which means he stayed out of India for nine years now so the above conditions are not fulfilled which makes him a non-resident.

Although the period of 60 days is substituted by 182 days as mentioned in the second point if an Indian citizen or a person of Indian origin visits India during the year. The same thing is also applicable to India who leaves India in any previous year as a crew member for the sake of employment.

An individual is said to be a not ordinarily resident in India in any previous year if such individual;

• Has been a non-resident in India in nine out of ten previous years preceding that year or during the seven previous years preceding that year amounts to seven hundred and twenty-nine days or less or,
• Manager of a Hindu undivided family has been non-resident in India in nine out of ten previous years  preceding that year or during the seven years preceding that years amounts seven hundred and twenty-nine days or less or,
• Citizen of India or a person of Indian origin having total income excluding from foreign resources exceeding fifteen lakh rupees during the previous years for a period which amounts to one hundred and twenty days or more but less than one hundred and eighty-two days.

According to FEMA Act, 1999

An individual is said to be a non-resident according to the FEMA Act, 1999 if a person is a citizen of India but resides outside India.

According to the provision of FEMA, 1999 as contained in Section 2(v) person who is a resident in India means if he resides in India for a period of more than 182 days during the preceding year still there are few exceptions in which the above definition is not applicable;

• If you stay out of India for the sake of employment.
• If you have gone abroad to set up your business.
• If you have gone abroad which explains your intention to stay outside India.

In such cases, a person is regarded as a person outside India(NRI) if he stays in India for more than 182 days.

A person which is resident outside India if he resides in India for 182 days or less than during the preceding year yet there are exceptions in which the above definition does not apply;

• If an individual stays in India for the sake of employment.
• If an individual comes to India for setting up a business.
• If an individual comes to India for any reason which specifically clears the intention of residing in India for a certain period of time.

For example; If an individual is settled abroad and comes to India for a reason other than business or employment and has no such intention to stay in India then he is considered to be a resident outside India.

How can NRIs invest?

NRI investments may be paid in the following manner;

1. Through inward from abroad directly.
2. Through Non-Resident External (NRE) or foreign Currency Non-Resident or Non-Resident Ordinary (NRO) accounts indirectly.

All the applicable rules, regulations, laws along with RBI notifications and policies have to be in strict compliance with all these accounts, deposits and transfers mentioned above. It is very simple to open these types of accounts and very similar to opening a regular bank account and first requires a few documents for the KYC.

a) Non-Resident External Account

These are types of bank accounts in which NRIs are only allowed to open and maintain a rupees account. Banks and authorized dealers which are authorized by the RBI open and maintain such types of bank accounts. These can be saving accounts, current accounts.

In such accounts, there are strict constraints allowed.

1. Transfer from NRE/FCNR accounts
2. All interests accrued on the accounts or on the investments.
3. Any maturity proceeds from investment.

In NRE accounts only local disbursements transfer to other NRE/FCNR accounts or investments in India are allowed. To make local payments in rupees the accounts can be withdrawn. There is an exemption from Indian Income Tax for interest earned on NRE accounts.

b) Foreign Currency Non-Resident Bank (FCNR) (CBI)

Only NRI’s in foreign exchange with the authorized dealers and banks authorized by the RBI are only allowed to maintain such types of accounts. Principal amount or return on investment is subjected to income tax act in such accounts.

In such an account currency cannot be converted into INR and it has to be maintained in foreign currency only. The FCNR account holder is allowed to avail loan against his account by the Reserve Bank of India. Though a loan cannot be taken for the following purposes.

• Real estate investment,
• Speculative purpose,
• Re-lending,
• Agriculture or plantation activities.

These types of accounts can be opened with the help of the following;

• Traveller’s cheque.
• Funds from an exciting FCNR account foreign currency notes.

c) Non-Resident Ordinary (NRO) 

Any person who lives outside India with an authorized dealer or bank can maintain this account.

Credit can be made in NRO accounts are as follows;

1. Dues which are legitimate in India,
2. Residents in India can make loans or gifts,
3. Transfer from other NRO accounts,
4. Any inward from outside India.

Debits that can be made in NRO accounts are as follows;

1. Current Income abroad,
2. Local payment,
3. Transfer to other NRO accounts, 
4. USP 1 million in one financial year,
5. Any other bonafide transaction.

Cabinet approvals and DIPP amendments

In the FDI policy, there were two relevant amendments made by the cabinet on May 21, 2015. The first amendment was to amend the definition of NRI defined in FDI Policy so as to align it with the definition of NRI in the Citizenship Act which was approved by Cabinet and brought into force by the Department of Industrial Policy and Promotion. The concept of registration as a PIO cardholder with the concept of registration as an OCI Cardholder was replaced by the amendment of the Citizenship Act, 1955 in January 2015.

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 Citizenship Act, 1955 is a Non-Resident India. Overseas Citizen of India cardholders is the persons of Indian Cardholders registered under a notification issued by the central government. The definition of NRI is aligned under two laws through the amendment which would bring consistency between exchange control regulations and the citizenship Act. Investment in Indian companies, partnerships and proprietary concerns, lending to Indian companies in INR and acquisitions of immovable property in India and a broad range of transactions by NRI are subject to change in definition.

The Second Amendment was to amend the relevant clause in the FDI Policy which states that investment by NRIs on a non-repatriation basis was approved by the cabinet and brought into force by DIPP would be considered as domestic investments. Investments by NRIs on a non-repatriation basis is dealt with separately under Schedule 4 under the Foreign Exchange Management

Regulations, 2000. This schedule differentiates investment by NRIs as foreign investment whether on a repatriation basis or on a non-repatriation basis. The amendment seeks to increase foreign investment on non-repatriation basis by NRI as a domestic investment so as to encourage the law and foreign investment.

The amendment in the simple language is that investment by NRI will be deemed to be domestic investment at par with the investment made by residents under Schedule 4 of FEMA Regulations. The consequence of this amendment is sectoral caps, pricing guidelines, a cap on coupon rate and investment by NRIs from an FDI perspective are subjected to restrictions that would not be applicable in the case of NRIs investing on a non-repatriation basis.

Investment by NRIs on the non-repatriation basis is a direct implication of this amendment and is immune from all sorts of FDI restrictions which give comfort and encourage NRIs to invest in India on a non-repatriation basis. While determining whether an Indian company is a foreign-owned company with 50% or more shareholding held by non-residents, investment by NRIs on a non-repatriation basis would not be included as another direct implication of this amendment. So, companies engaged in sectors subject to sectoral caps or specific conditions existing limitations would not apply in case of investment by NRIs on a non-repatriation basis from the perspective of downstream investment.

Conclusion

Either automatic or government-approved path any NRI is allowed to invest in India depending on the sector in which NRI is interested to invest and subject to exclusion of prohibited sectors. It is to be kept in the mind of NRI investors that Foreign Direct Investment is a capital account transaction and any violation of the regulations, rules and laws associated with it is critical and attracts penal provisions under FEMA. The Directorate of Enforcement, Ministry of Finance and the Government of India has the authority to investigate if there is any violation in the transaction under FEMA administered by RBI. Recent developments of various business schemes connect many more NRIs to invest in India.

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