In this article, Dheerajendra Patanjali who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses How Can PIOs’ and NRIs’ Invest In an Indian Business: Regulations and Best Practices.

“Non-Resident Indians (NRIs) may, purchase on repatriation basis, shares and convertible debentures of Indian companies under the FDI scheme … NRI may also purchase shares and convertible debentures of Indian Companies through stock exchange under Portfolio Investment Scheme,… Except few prohibited sectors as notified in FDI policy, a NRI may without any limit purchase on non- repatriation basis, shares or convertible debentures of an Indian company issued whether by public issue or private placement or right issue”[1].

Introduction

Investment by Non-Resident Indians (NRI)  and Person of Indian Origins (PIO) is a critical driver of economic growth, as well as major source of non-debt financial resource for the economic development of India. NRI and PIO invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. Post liberalisation, Indian government has provided a conducive environment and supporting regulatory regime to NRI’s and PIO’s for investment in India. It has put in place an investor-friendly policy under which FDI up to 100% is permitted under the automatic route in most sectors/activities including investments from Non-Resident Indians.

It is interesting to note that the total FDI investments India received during April – December 2016 was $ 35,844.32 million[2] which aptly demonstrate the importance of India as investment destination. NRIs/PIOs are allowed to invest in the primary and secondary capital markets in India and their activities, with respect to investment in Indian market, are primarily regulated by the Reserve Bank of India, subject to fulfilment of requirement of other sectoral regulators. Additionally, the Reserve Bank of India also monitors the ceilings on NRI/PIO investments in Indian companies on a daily basis.

Who is NRI/PIO

Non-Resident Indian (NRI) means a “person resident outside India” who is a citizen of India or is a person of Indian origin. An Indian citizen who is ordinarily residing outside India and holds an Indian Passport[3]. All benefits as available to Indian citizens subject to notifications issued by the Government from time to time are available to NRI. Further, he does not require visa for visiting India and can undertake all activities permissible under Indian Laws.

At the same time, a person who or whose any of ancestors was an Indian national and who is presently holding another country’s citizenship/ nationality i.e. he/she is holding foreign passport is considered as Person of Indian Origins (PIO). It is important to note that he is required to register with the local police authorities in India, if the period of stay in India is for more than 180 days. Further he can undertake only those activities in India which have been mentioned in the visa obtained. However, as per Citizenship Act, 1955[4], he can acquire Indian Citizenship but for the same, he has to be ordinarily resident in India for a period of 7 years before making an application for registration[5].

Further, Government has recently extended the definition of NRI by notifying that “Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955”[6]. The aforesaid decision of the Government including OCI cardholders as well as PIO cardholders in the definition of NRI is meant to align the FDI policy to provide PIOs and OCIs parity with Non-Resident Indians in respect of economic, financial and educational fields vis-a-vis investment opportunity.

Avenues of Investment For NRI/PIO in Indian Business

NRI/PIO has several mutually beneficial options available for becoming part of the economic development of the Country. In this regard, Reserve Bank of India has granted general permission to NRIs/PIOs, for undertaking direct investments in Indian companies, under the Automatic Route, purchase of shares under Portfolio Investment Scheme, investment in companies and proprietorship/partnership concerns on non-repatriation basis (that is NRI cannot convert Invested money back to foreign currency ) and for remittances of current income[7]. Further, NRI/PIO are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis (that is, invested money can be converted to an investor’s home country), subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels[8].

To invest on a repatriable basis NRI must have an NRE account or FCNR account with a bank in India. In this case the investment money should be remitted through usual banking channels or from the NRE/FCNR account of the NRI investor. Investment in India can be made on a non-repatriation basis as well with investment funds being provided from NRO account or NRE/FCNR account of the investor.

Here it is important to understand that a Non-Resident External (NRE) account is a bank account that’s opened by depositing foreign currency at the time of opening a bank account. This currency can be tendered in the form of traveler’s checks or notes. Whereas a Non-Resident Ordinary (NRO) account, is the normal bank account opened by an Indian going abroad with the intention of becoming an NRI. NRO account can also be opened by sending remittances by NRI from his residing country or by transferring funds from his other NRO account. It offers the same facilities as an NRE account, except that any repatriation done through this account should be reported to RBI by filling up prescribed forms.

Portfolio Investment Scheme (PIS)

Portfolio Investment Scheme (PIS) is a scheme of Reserve Bank of India which provides NRIs an opportunity to purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under this Scheme.  The scheme lays down detail terms and conditions required to be fulfilled by NRI/PIO to invest under this scheme, eg the NRI/PIO has to apply to a designated branch of a bank, which deals in Portfolio Investment and all sale/purchase transactions are to be routed through the designated branch.

Investment by Non-Resident Indian (NRI) on a Stock Exchange in India on Repatriation basis[1]

A Non-resident Indian may purchase or sell shares, convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle, on repatriation basis, on a recognised stock exchange, subject to the following conditions:

• NRIs may purchase and sell shares /convertible preference shares/ convertible debentures /warrants and units under the Portfolio Investment Scheme through a branch designated by an Authorised Dealer for the purpose;
• The paid-up value of shares of an Indian company purchased by any individual NRI should not exceed five percent of the paid-up value of shares issued by the company concerned;
• the paid-up value of convertible preference shares or convertible debentures of any series purchased by any individual NRI on repatriation basis should not exceed five percent of the paid-up value of convertible preference shares or convertible debentures of that series issued by the company concerned;
• the paid-up value of warrants of any series purchased by any individual NRI on repatriation basis should not exceed five percent of the paid-up value of warrants of that series issued by the company concerned;
• the aggregate paid-up value of shares of any company purchased by all NRIs on repatriation basis should not exceed ten percent of the paid-up value of shares of the company and the aggregate paid-up value of each series of convertible preference shares or convertible debentures or warrants purchased by all NRIs should not exceed ten percent of the paid-up value of that series of convertible preference shares or convertible debentures or warrants;

Provided that the aggregate ceiling of ten per cent referred to in this clause may be raised to twenty-four per cent if a special resolution to that effect is passed by the General Body of the Indian company concerned;

• The NRI investor should take delivery of the shares/convertible preference shares/ convertible debentures /warrants and units purchased and give delivery of the same when sold;

Investment by Non-Resident Indian (NRI), on Non-Repatriation basis[1]

A Non-resident Indian (NRI), including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians, may acquire and hold, on non-repatriation basis, equity shares, convertible preference shares, convertible debenture, warrants or units, which will be deemed to be domestic investment at par with the investment made by residents. It is further provided that-

• An NRI may acquire, on non-repatriation basis, any security issued by a company without any limit either on the stock exchange or outside it.
• An NRI may invest, on non-repartition basis, in units issued by an investment vehicle without any limit, either on the stock exchange or outside it.
• An NRI may contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietary firm or a Limited Liability Partnership without any limit.

Steps that an NRI has to follow for equity trading

NRI who wishes to invest in shares in India through a stock exchange need to approach the designated branch of any authorized dealer (bank) authorized by reserve bank to administer the PIS (Portfolio Investment Scheme) and to open a NRE (Non Resident External) /NRO (Non-Resident Ordinary) account under the scheme for routing Investments. These steps can be summarised as under –

• Open a bank account with approved designated bank branch
• Take approval of designated bank for investment in Indian Stock Market.
• Open a Demat Account with a Depository Participant
• Open a Trading account with a SEBI registered broker to execute trades on its behalf on the Exchange

Investment in Mutual Fund

An NRI can invest in mutual fund both on a repatriable or on a non-repatriable basis, as preferred by the investor.

Repatriable Basis[1]

To invest on a repatriable basis, NRI is required to have an NRE or FCNR Bank Account in India. The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on repatriation basis, subject to the following conditions:

• The mutual fund should comply with the terms and conditions stipulated by SEBI.
• The amount representing investment should be received by inward remittance through normal banking channels, or by debit to an NRE / FCNR account of the non-resident investor.
• The net amount representing the dividend / interest and maturity proceeds of units may be remitted through normal banking channels or credited to NRE / FCNR account of the investor, as desired by him subject to payment of applicable tax.

Non-Repatriable Basis[2]

The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on non-repatriation basis, subject to the condition that funds for investment should be provided by debit to NRO account of the NRI investor. It is important to note that no permission of Reserve Bank either by the Mutual Fund or the NRI investor is necessary.

Investment by NRI/PIO in Government securities

On non-repatriation basis NRIs can freely purchase Central and State Government securities (other than bearer securities) and National Plan/ Savings Certificates by remittances from abroad through normal banking channels or by withdrawing funds from their non-resident accounts with banks in India. Such investments should be made through the banks maintaining their non-resident accounts. The banks have been permitted to credit the dividend/ interest and sale or maturity proceeds of the units/ securities to Ordinary Non-resident accounts of NRI[1].

They can also invest on non-repatriation basis, in bonds issued by public sector undertakings provided they have secured RBI permission to seek investments from Non-Residents. The dividend and interest income from the investment as well as the sale proceeds/ maturity proceeds of securities purchased by remittances from abroad or by withdrawing funds from NRE/ FCNR accounts can be remitted outside India or may be credited to the investor’s NRE/ FCNR accounts[2].

NRI have also been permitted to invest in other sector eg real estate etc, subject to certain conditions. A Non-Resident Indian can also invest in the capital of a firm or a proprietary concern in India on non-repatriation basis provided;

1. Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers/Authorized banks.
2. The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.
3. Amount invested shall not be eligible for repatriation outside India.

Taking into account the facilities that are already available, it can aptly be concluded that the areas in which facilities available to NRIs/PIOs are the same as available to domestic residents except relating to investment by NRIs/PIOs in real estate/agriculture and plantation business, Chit Funds, 10 Nidhis etc.

Entry Routes for Investment[3]

Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route.

Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route, are considered by FIPB.

Foreign investment in sectors/activities under government approval route will be subject to government approval where:

• An Indian company is being established with foreign investment and is not owned by a resident entity or
• An Indian company is being established with foreign investment and is not controlled by a resident entity or
• The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to nonresident entities through amalgamation, merger/demerger, acquisition etc. or
• The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to nonresident entities through amalgamation, merger/demerger, acquisition etc.
• Investment by NRIs 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.
• A company, trust and partnership firm incorporated outside India and owned and controlled by non-resident Indians will be eligible for investments under Schedule 4 of FEMA (Transfer or issue of Security by Persons Resident Outside India) Regulations and such investment will also be deemed domestic investment at par with the investment made by residents.

The above list is inclusive one and the entiries of this list may change from time to time as per the extant policy of government prevalent at that time. At the same time, it is important to note that the investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy prevalent at that time. Investments by non-residents can be permitted in the capital of a resident entity in certain sectors/activity with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc.

Prohibition on foreign investment in India

Foreign investment in any form, including by NRI, is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities[4]

• Business of chit fund, or
• Nidhi company, or
• Agricultural or plantation activities, or
• Real estate business, or construction of farm houses, or
• Trading in Transferable Development Rights (TDRs).

( It is clarified that “real estate business” means dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.)

It is further clarified that partnership firms /proprietorship concerns having investments as per FEMA regulations are not allowed to engage in print media sector.

In addition to the above, Foreign investment in the form of FDI, including investment by NRI, is also prohibited in certain sectors such as:[5]

1. Lottery Business including Government/ private lottery, online lotteries, etc.
2. Gambling and Betting including casinos etc.
3. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
4. Activities / sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations.

Regulations dealing with NRI investment

NRI investments are governed under the Foreign Exchange Management Act, 1999 (FEMA), regulations specified by the Securities and Exchange Board of India (SEBI), the Foreign Direct Investment policy of the ministry of commerce (the FDI Policy), and the regulatory framework and instructions issued by the Reserve Bank under FEMA. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No. FEMA 20/2000-RB dated May 3, 2000).

The main regulatory and facilitation agencies involved in the matters related to NRIs investment are Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Authority for Advance Rulings (AAR), Secretariat for Industrial Assistance (SIA), Ministry of Commerce & Industry; and Office of the Chief Commissioner (Investments & NRIs). Briefly their areas of activities are as under –

1. Reserve Bank of India (RBI) – Reserve Bank of India regulates the investment by persons resident outside India. In order to simplify the regulations and procedures they issue ‘general permission’ from time to time so that no specific permission are required for the activities covered under the ‘general permission’. The specific permission as required under Foreign Exchange Regulations are granted by Foreign Investment Division, Foreign Exchange Department or the concerned Regional office of RBI depending upon the nature of permission required.
2. Securities and Exchange Board of India (SEBI) – The Overseas Investor Cell of SEBI provides answers to queries on registration procedures, formalities and other investment related issues pertaining to SEBI to all overseas investors including NRIs through its website at sebi.gov.in/.
3. Authority for Advance Rulings (AAR) for Income Tax – The Authority for Advance Rulings enables non-residents to obtain, in advance, a binding ruling on the issues that could arise in determining their Income Tax liabilities. The Authority is empowered to determine any question of law or of fact as specified in the application made before it in respect of a transaction, which has been undertaken or is proposed to be undertaken, by a non-resident. Any Non Resident person, company, firm, association of persons or other body corporate, can make an application for seeking an advance ruling. The Authority is a high level quasi-judicial body to be headed by a retired judge of the Supreme Court and two Members of Additional Secretary level, experts in technical and legal matters. The process of seeking a ruling is very simple, inexpensive, expeditious and transparent. All accepted judicial norms are followed before a ruling is given.
4. Secretariat for Industrial Assistance (SIA) – SIA has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Govt. decisions on applications filed, assisting entrepreneurs and investors in setting up projects, (including liaison with other organisations and State Govt.) and in monitoring implementation of projects.
5. Foreign Investment Implementation Authority (FIIA) – Foreign Investment Implementation Authority (FIIA) was established in Department of Industrial Policy & Promotion, Ministry of Commerce & Industry on 09.08.1999, to assist the foreign investors in getting necessary approvals and thereby facilitating quick translation of Foreign Direct Investment (FDI) approvals into implementation.

Conclusion

To be part of growth story of one of fastest growing economy of world, NRI has several mutually beneficial options available to invest in Indian business. NRIs has got option to make investment under Portfolio Investment Scheme, in companies and proprietorship/partnership concerns on non-repatriation basis. Further, NRI are also permitted to invest in shares and convertible debentures of Indian companies on repatriation basis. They can freely purchase Central and State Government securities (other than bearer securities) and National Plan/ Savings Certificates. They can invest in mutual funds. That is to say that facilities available to NRIs/PIOs are the same as available to domestic residents except relating to investment by NRIs/PIOs in real estate/agriculture and plantation business, Chit Funds, 10 Nidhis etc.

Further, their investment in well regulated in India and subject to compliance of different rules which includes sectoral rul compliance. Primarily, their investment is governed under the Foreign Exchange Management Act, 1999 (FEMA), regulations specified by the Securities and Exchange Board of India (SEBI), the Foreign Direct Investment policy of the ministry of commerce,and the regulatory framework and instructions issued by the Reserve Bank under FEMA.

References

[1] International Research Journal of Social Sciences, 37-40, November (2013)

[2] International Research Journal of Social Sciences, 37-40, November (2013)

[3] Consolidated FDI Policy Circular of 2016, http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf

[4] ‘Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000’, https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=155, retrieved on 11.04.2017

[5] ‘Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000’, https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=155, retrieved on 11.04.2017

[1] http://www.tatamutualfund.com/investor/nri-corner/overview, retrieved on 28.04.2017

[2] http://www.tatamutualfund.com/investor/nri-corner/overview, retrieved on 28.04.2017

[1] Schedule-4,Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

[1] Schedule-3,Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

[1] LOK SABHA, UNSTARRED QUESTION NO:4465,ANSWERED ON: 08.08.2014 on “NRI INVESTMENT IN FDI”

[2] LOK SABHA, UNSTARRED QUESTION NO:2922,ANSWERED ON: 20.04.2017 on “Foreign Direct Investment”

[3]Ministry of Home Affairs, Government of India, http://mha1.nic.in/pdfs/oci-chart.pdf, retrieved on 10.04.2017

[4] section 5(1)(a) & 5(1)(c) of the Citizenship Act, 1955

[5] Ministry of Home Affairs, Government of India, http://mha1.nic.in/pdfs/oci-chart.pdf, retrieved on 10.04.2017

[6] Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

[7] READY RECKONER FOR NON-RESIDENT INDIANS INVESTMENT, INVESTMENT PROMOTION & INFRASTRUCTURE DEVELOPMENT CELL, DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, MINISTRY OF COMMERCE & INDUSTRY GOVERNMENT OF INDIA, Page no -9.

[8] RBI/2014-15/6 Master Circular No. 15/2014-15, https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9006#f4,  retrieved on 10.04.2017