money matters for NRIs
Basics of Foreign Investments in India

Foreign Investments in India attract the provisions of Section 6, of the Foreign Exchange Management Act (FEMA) 1999 and is subject to the Regulations issued by the Reserve Bank of India, under FEMA, 1999.

An Indian entity cannot issue any security to a person resident outside India or record in its books any transfer of security from or to such person, except as provided in the Act, or Rules, or Regulations, or with the specific permission of the Reserve Bank.

Prohibition on Investment in India

No person resident outside India can make investment in a company, or a partnership firm, or a proprietary concern, or any entity; whether incorporated or not, which is engaged or proposes to engage in the following activities:

1. Business of chit fund, or

2. Company, or

3. Agricultural or plantation activities, or

4. Real estate business, or construction of farm houses

5. Trading in Transferable Development Rights (TDRs)

6. Lottery, gambling and betting.

It is clarified that Real Estate Business does not include development in townships, construction of residential/commercial premises, roads or bridges.

 Permitted Investments in India

In other cases investments can be made either with the specific prior approval of the Government of India, the Secretariat for Industrial Assistance/Foreign Investment Promotion Board (SIA/FIPB), or under the Automatic route. The Automatic Route is not open in the following cases and such require specific approval of FIPB i.e.,

1. where the non-resident investors who have/had a previous financial/ technical / trademark collaboration in an existing domestic company engaged in the same or allied activity,

2. if the activity or manufacturing item of the issuer company requires an Industrial License under the provisions of the Industries (Development & Regulation) Act, 1951 or under the locational policy notified by Government of India under the Industrial Policy Resolution, 1991; and

3. the investment is sought in excess of the prescribed sectoral limits Automatic Route.

While the nature of investment activities have been prescribed in the FEMA Regulations, the scope of these activities, especially regarding the investments by Non-Residents, under the Government approval route, have been detailed in the Government Manual on Investing in India, Foreign Direct Investment, Policy & Procedures. This is a document which is available in the public domain and can be downloaded from the website of DIPP, Ministry of Commerce & Industry.

 Eligibility for Investing in India

A person resident outside India (other than a citizen of Pakistan or Bangladesh), or an incorporated entity outside India, (other than an entity incorporated in Bangladesh or Pakistan), has the general permission to purchase shares, or convertible debentures, or preference shares of an Indian company, subject to certain terms and conditions. A citizen of Bangladesh, or an entity registered in Bangladesh can, with prior approval of FIPB, purchase shares and convertible debentures of an Indian company.

A person residing outside India can purchase shares/ convertible debentures/ convertible preference shares of Indian companies under FDI policy and an Indian company can receive consideration in advance towards such instruments. These companies must issue the shares within 180 days failing which money should not be refunded.

 Nature of Investment

The Indian companies have general permission to issue equity/ preference/ convertible preference shares and convertible debentures subject to certain conditions.

Investment in a trading company incorporated in India is permitted under automatic route with FDI upto 51% provided the Indian company is primarily engaged in export activities; and the undertaking is an export house/ trading house/ super trading house/ star trading house. Government also permits certain trading activities under FIPB route.

A company, which is a small scale industrial unit and which is not engaged in any activity, or in manufacture of items that are not permitted may issue shares, or convertible debentures to a non-resident, to the extent of 24% of its paid-up capital. Such a company may issue shares in excess of 24% of its paid up capital if –

1. It has given up its small scale status,

2. It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector.

An Export Oriented Unit or a unit in Free Trade Zone, or in Export Processing Zone, or in Software Technology Park, or in an Electronic Hardware Technology Park may issue shares or convertible  debentures to a person resident outside India in excess of 24% provided it conforms to the ceilings.

Foreign Direct Investments in Asset Reconstruction Companies (ARCs)

Persons/ entities resident outside India (other than Foreign Institutional Investors (FIIs)), eligible under the Foreign Direct Investment (FDI) scheme for investing in India are permitted to invest in the equity capital of Asset Reconstruction Companies (ARCs), registered with the Reserve Bank of India. Such investments have to be strictly in the nature of FDI and investments by FIIs are not permitted. Automatic Route is not available for such investments. The applications are considered by FIPB, subject to the following conditions:

1. Maximum foreign equity shall not exceed 49% of the paid up capital of the ARC.

2. Where investment by any individual entity exceeds 10% of paid up equity capital, ARC should comply with provisions of Section 3 (3)(f) of Securitization and Reconstruction of Financial Assets Enforcement of Security Interest Act, 2002 (SARFAESI Act or Securitization Act), which states that a sponsor, shall not be holding company of the securitization company, or reconstruction company, as the case may be, or, does not otherwise hold any controlling interest in such securitization company or reconstruction company, for the purpose of obtaining registration from RBI.

General permission has been granted to FIIs registered with SEBI to invest in Security Receipts (SRs) issued by ARCs registered with RBI. FIIs can invest upto 49% of each tranche of scheme of SRs subject to condition that investment of a single FII in each tranche of scheme of SRs shall not exceed 10% of the issue.

 Investment in a Firm or a Proprietary Concern in India by a Person Resident outside India

A non-resident Indian or a person of Indian origin resident outside India may invest by a way of contribution to 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/ NRO account maintained with an authorized dealer.

2. The firm or proprietary concern is not engaged in any agricultural/ plantation or real estate business (i.e. dealing in land and immovable property with a view to earning profit or earning income there from) or print media sector.

3. Amount invested shall not be eligible for repatriation outside India.

Investment in Sole Proprietorship concern/ Partnership Firm with Repatriation Benefits

NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/ partnership firms with repatriation benefits.


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