RBI/2009-10/22
Master Circular No.2/2009-10

July 01, 2009

To,

All Category - I Authorised Dealer banks

Madam / Sir,

Master Circular on Foreign Investment in India

Foreign investment in India is governed by sub-section (3) of Section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time. The regulatory framework and instructions issued by the Reserve Bank have been compiled in this Master Circular. The list of underlying circulars/notifications is furnished in Appendix. In addition to the above, this Master Circular also covers the following areas:

(i) Acquisition of immovable property which is regulated in terms of Section 6(3) (i) of Foreign Exchange Management Act, 1999 read with Notification No. FEMA 21/ 2000-RB dated May 3, 2000;

(ii) Establishment of Branch/Liaison Office in India, which is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999 read with Notification No. FEMA 22/ 2000-RB dated May 3, 2000; and

(iii) Investment in capital of partnership firms or proprietary concern which is regulated in terms of Section 2(h) of Section 47 of Foreign Exchange Management Act, 1999, read with Notification No. FEMA 24/2000-RB dated May 3, 2000.

2. This Master Circular is being issued with a sunset clause of one year.  This circular will stand withdrawn on July 1, 2010 and be replaced by an updated Master Circular on the subject.

Yours faithfully,

(Salim Gangadharan)
Chief General Manager-in-Charge

Section - I: Foreign Direct Investment

1. Foreign Direct Investment in India

Foreign Direct Investment (FDI) in India is governed by the FDI Policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA), 1999. Reserve Bank has issued Notification No. FEMA 20 /2000-RB dated May 3, 2000 which contains the Regulations in this regard. This Notification has been amended from time to time.

2.  Entry routes for investments in India

(i) Foreign Direct Investment is freely permitted in almost all sectors. Under the Foreign Direct Investments (FDI) Scheme, investments can be made by non-residents in the shares / convertible debentures / preference shares¹ of an Indian company, through two routes; the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required.

If the investor has existing venture or tie-up in India as on January 12, 2005, through investment / technical collaboration / trade mark agreement in the same field in which the Indian company, whose shares are being issued, is engaged, he has to obtain prior permission of Secretariat of Industrial Assistance (SIA) / Foreign Investment Promotion Board (FIPB), to acquire the shares. This restriction is, however, not applicable to the issue of shares for investments to be made by Venture Capital Funds registered with the Securities and Exchange Board of India (SEBI).  This restriction is also not applicable for investments by multinational financial institutions; or where in the existing joint venture, investment by either of the parties is less than 3 per cent; or where the existing joint venture / collaboration is defunct or sick or for issue of shares of an Indian company engaged in Information Technology sector or in the mining sector, if the existing joint ventureor technology transfer / trade mark agreement of the person to whom the shares are to be  issued are also in the Information Technology sector or in the mining sector for same area / mineral.

Entry route for non-resident investors in India as well as sector-specific investment limits in India are given in Annex -1.

(ii)  FDI Policy is formulated by the Government of India. The policy and procedures in respect of FDI in India is available in "the Manual on Investing in India - Foreign Direct Investment, Policy & Procedures".  This document is available in public domain and can be downloaded from the website of Ministry of Commerce and Industry, Department of Industrial Policy and Promotion - http://www.dipp.nic.in/manual/fdi_text_manual_nov_2006.pdf.

FEMA Regulations prescribe the mode of investments i.e. manner of receipt of funds, issue of shares / convertible debentures and preference shares and reporting of the investments to the Reserve Bank.

3. Prohibition on investment in India

(i) Foreign investment in any form 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 activities²:

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

(ii) It is clarified that “real estate business” 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.

(iii) In addition to the above, investment in the form of FDI is also prohibited in certain sectors such as (Annex-2)³:

(a) Retail Trading (except single brand product retailing)
(b) Atomic Energy
(c) Lottery Business
(d) Gambling and Betting
(e) Business of chit fund
(f) Nidhi company
(g) Trading in Transferable Development Rights(TDRs)
(h) Activities / sectors not opened to private sector investment
(i) Agriculture (excluding Floriculture, Horticulture, Development of  seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)

4. Eligibility for Investment in India

(i) A person⁴ resident outside India (other than a citizen of Pakistan) or an entity incorporated outside India, (other than an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy of the Government of India. A person who is a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Scheme, with the prior approval of the FIPB.

(ii) Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least sixty per cent by Non-Resident Indians and includes overseas trust in which not less than sixty per cent beneficial interest is held by Non-Resident Indians, directly or indirectly, but irrevocably. OCBs have been de-recognised as a class of investors in India with effect from September 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under adverse notice of Reserve Bank can make fresh investments under the FDI Scheme as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government Route; and with the prior approval of Reserve Bank if the investment is through Automatic Route.

5. Type of instruments

i) Indian companies can issue equity shares, fully and mandatorily convertible debentures and fully and mandatorily convertible preference shares subject to pricing guidelines / valuation norms prescribed under FEMA Regulations.

ii) Issue of other types of preference shares such as, non-convertible, optionally convertible or partially convertible, have to be in accordance with the guidelines applicable for External Commercial Borrowings (ECBs).Since these instruments are denominated in rupees, the rupee interest rate will be based on the swap equivalent of London Interbank Offered Rate (LIBOR) plus the spread permissible for ECBs of corresponding maturity.

iii) As far as debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy.

6.  Investments in Small Scale Industrial (SSI) units

(i)  A foreign investor can invest in an Indian company which is a Small Scale Industrial Unit provided it is not engaged in any activity which is prohibited under the FDI policy. Such investments are subject to a limit of 24 per cent of paid-up capital of the Indian company/SSI unit.  An SSI unit can issue equity shares / fully and mandatorily convertible preference shares / fully and mandatorily convertible debentures more than 24 per cent of its paid-up capital if :

(a) It has given up its small scale unit status,
(b) It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and
(c) It complies with the sectoral caps specified in Annex -1.

7. Investments in Asset Reconstruction Companies (ARCs)

(i)  Persons resident outside India [other than Foreign Institutional Investors (FIIs)], can invest in the equity capital of Asset Reconstruction Companies (ARCs) registered with Reserve Bank only under the Government Route. Automatic Route is not available for such investments. Such investments have to be strictly in the nature of FDI. Investments by FIIs are not permitted in the equity capital of ARCs and FDI is restricted to 49 per cent of the paid-up capital of the ARC.

(ii)  However, FIIs registered with SEBI can invest in the Security Receipts (SRs) issued by ARCs registered with Reserve Bank. FIIs can invest up to 49 per cent of each tranche of scheme of SRs, subject to the condition that investment by a single FII in each tranche of SRs shall not exceed 10 per cent of the issue.

8.  Investment in infrastructure companies in the Securities Market

Foreign investment is permitted in infrastructure companies in Securities Markets, namely, stock exchanges, depositories and clearing corporations, in compliance with SEBI Regulations and subject to the following conditions :

i. There is a composite ceiling of 49 per cent for Foreign Investment, with a FDI limit of 26 per cent and an FII limit of 23 per cent of the paid-up capital;
ii. FDI will be allowed with specific prior approval of FIPB; and
iii. FII can invest only through purchases in the secondary market.

9.  Investment in Credit Information Companies

Foreign investment is permitted in Credit Information Companies in compliance with the Credit Information Companies (Regulations) Act, 2005 and subject to the following:

i. The aggregate foreign investment in Credit Information Companies is permitted only up to 49 per cent of the paid up capital.

ii. Foreign investment up to 49 per cent is allowed only with the prior approval of FIPB and regulatory clearance from the Reserve Bank.

iii. Investment by SEBI Registered FIIs is permitted only through purchases in the secondary market to an extent of 24 per cent which should be within the overall limit of 49 per cent for foreign investment.

iv. No FII can individually hold directly or indirectly more than 10 per cent of the equity.

10. Investment in Commodity Exchanges

Foreign investment is permitted in Commodity Exchanges subject to the following conditions:

i. There is a composite ceiling of 49 per cent for Foreign Investment, with a FDI limit of 26 per cent and an FII limit of 23 per cent.

ii. FDI will be allowed with specific prior approval of the FIPB.

iii. The FII purchases in equity of Commodity Exchanges are restricted to the secondary markets only.

iv. Foreign Investment in Commodity Exchanges is also subject to compliance with the regulations issued, in this regard, by the Forward Market Commission.

11. Investment in Public Sector banks

FDI and Portfolio Investment in nationalised banks are subject to overall statutory limits of 20 per cent as provided under Section 3 (2D) of the Banking Companies (Acquisition & Transfer of Undertakings) Acts, 1970/80. The same ceiling would also apply in respect of such investments in State Bank of India and its associate banks.

12. Investments from Nepal & Bhutan    

 NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis, 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.

13. Issue of Rights / Bonus shares

FEMA provisions allow Indian companies to freely issue Rights / Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, if any. However, such issue of bonus / rights shares have to be in accordance with other laws / statutes like the Companies Act, 1956, SEBI (Disclosure and Investor Protection) Guidelines (in case of listed companies), etc. The price of shares offered on rights basis by the Indian company to non-resident shareholders shall not be lower than the price at which such shares are offered to resident shareholders.

14. Prior permission of Reserve Bank for Rights issue to erstwhile OCBs

OCBs have been de-recognised as a class of investors with effect from September 16, 2003. Therefore, companies desiring to issue rights share to such erstwhile OCBs will have to take specific prior permission from the Reserve Bank⁵. As such, entitlement of rights share is not automatically available to OCBs. However, bonus shares can be issued to erstwhile OCBs without the Reserve Bank approval.

15. Additional allocation of rights share by residents to non-residents

Existing non-resident shareholders are allowed to apply for issue of additional shares / convertible debentures / preference shares over and above their rights share entitlements. The investee company can allot the additional rights share out of unsubscribed portion, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap.

16. Acquisition of shares under Scheme of Merger / Amalgamation

Mergers and amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/amalgamation. Once the scheme of merger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that :

(i)  the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap, and

(ii) the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy (refer para 3 above).

17. Issue of shares under Employees Stock Option Scheme (ESOPs)

i) Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, other than to the citizens of Pakistan. Citizens of Bangladesh can invest with the prior approval of the FIPB. Shares under ESOPs can be issued directly or through a Trust subject to the condition that :

a. The scheme has been drawn in terms of relevant regulations issued by the SEBI,  and

b. The face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5 per cent of the paid-up capital of the issuing company.

ii. Unlisted companies have to follow the provisions of the Companies Act, 1956. The Indian company can issue ESOPs to employees who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the prior approval of the FIPB.

iii.The issuing company is required to report the details of such issues to the Regional Office concerned of the Reserve Bank, within 30 days from the date of issue of shares.

18.  Reporting of FDI

(i) Reporting of inflow

(a)  An Indian company receiving investment from outside India for issuing shares / convertible debentures / preference shares under the FDI Scheme, should report the details of the amount of consideration to the Regional Office concerned of the Reserve Bank not later than 30 days from the date of receipt in the Advance Reporting Form enclosed in Annex - 6.

The Form can also be downloaded from the Reserve Bank's
website/en/web/rbi/forms?category=9118551.

(b)  Indian companies are required to report the details of the receipt of the amount of consideration for issue of shares / convertible debentures, through an AD Category - I bank, together with a copy/ies of the FIRC/s evidencing the receipt of the remittance along with the KYC report (enclosed as Annex – 7) on the non-resident investor from the overseas bank remitting the amount. The report would be acknowledged by the Regional Office concerned, which will allot a Unique Identification Number (UIN) for the amount reported.

(ii)  Time frame within which shares have to be issued

The equity instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor.  In case, the equity instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and could attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the Reserve Bank, on the merits of the case.

(iii)  Reporting of issue of shares

(a)  After issue of shares (including bonus and shares issued on rights basis) and shares issued under ESOP)/fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file Form FC-GPR, enclosed in Annex - 8, not later than 30 days from the date of issue of shares. The Form can also be downloaded from the Reserve Bank's website /en/web/rbi/forms?category=9118551. 

(b)  Part A of Form FC-GPR has to be duly filled up and signed by Managing Director/Director/Secretary of the Company and submitted to the Authorised Dealer of the company, who will forward it to the Reserve Bank. The following documents have to be submitted along with Part A:

(i) A certificate from the Company Secretary of the company certifying that :

a) all the requirements of the Companies Act, 1956 have been complied with;
b) terms and conditions of the Government’s approval, if any, have been complied with;
c) the company is eligible to issue shares under these Regulations; and
d) the company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration.

(ii) A certificate from Statutory Auditor or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

(c) The report of receipt of consideration as well as Form FC-GPR have to be submitted by the AD bank to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of the company is situated.

(d) Part - B of Form FC-GPR should be filed on an annual basis by the Indian company, directly with the Reserve Bank⁶. This is an annual return to be submitted by 31st of July every year, pertaining to all investments by way of direct/portfolio investments/re-invested earnings/other capital in the Indian company made during the previous years (i.e. the information in Part B submitted by 31st July 2009 will pertain to all the investments made in the previous years up to March 31, 2009). The details of the investments to be reported would include all foreign investments made into the company which is outstanding as on the balance sheet date. The details of overseas investments in the company both under direct / portfolio investment may be separately indicated.

(e) Issue of bonus/rights shares or stock options to persons resident outside India directly or on amalgamation / merger with an existing Indian company, as well as issue of shares on conversion of ECB / royalty / lumpsum technical know-how fee / import of capital goods by units in SEZs has to be reported in Form FC-GPR.

19. Issue Price

Price of shares issued to persons resident outside India under the FDI Scheme, shall be on the basis of SEBI guidelines in case of listed companies. In case of unlisted companies, valuation of shares has to be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues (CCI).

20. Foreign Currency Account

Indian companies which are eligible to issue shares to persons resident outside India under the FDI Scheme will be allowed to retain the share subscription amount in a Foreign Currency Account, with the prior approval of Reserve Bank.

21. Transfer of Shares and convertible debentures

(i) Foreign investors can also invest in Indian companies by purchasing / acquiring existing shares from Indian shareholders or from other non-resident shareholders. General permission has been granted to non-residents / NRIs for acquisition of shares by way of transfer subject to the following:

a. A person resident outside India (other than NRI and OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs).

b. NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI.In both the above cases, if the transferee has existing venture or tie-up in India as on January 12, 2005, through investment/technical collaboration/trade mark agreement in the same field in which the Indian company, whose shares are being transferred, is engaged, he has to obtain prior permission of SIA/FIPB to acquire the shares. This restriction is, however, not applicable to the transfer of shares for investments to be made by Venture Capital Funds registered with SEBI; investments by multinational financial institutions (i.e. ADB, IFC, CDC, DEG); or where in the existing joint venture investment by either of the parties is less than 3 per cent; or where the existing joint venture / collaboration is defunct or sick or for  transfer of shares of an Indian company engaged in Information Technology sector or in the mining sector, if the existing joint venture or technology transfer/trade mark agreement of the person to whom the shares are to be  transferred are also in the Information Technology sector or in the mining sector for same area/mineral.

c. A person resident outside India can transfer any security to a person resident in India by way of gift.

d. A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI.

e. A person resident in India can transfer by way of sale, shares / convertible debentures (including transfer of subscriber's shares), of an Indian company in sectors other than financial services sector (i.e. Banks, NBFC, Insurance, ARCs, CICs, infrastructure companies in the securities market viz. Stock Exchanges, Clearing Corporations, and Depositories, Commodity Exchanges, etc.) under private arrangement to a person resident outside India, subject to the guidelines given in Annex - 3.

f. General permission is also available for transfer of shares / convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to the guidelines given in Annex - 3.

g. The above General Permission also covers transfer by a resident to a non-resident of shares / convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route of RBI, as well as transfer of shares by a non-resident to an Indian company under buyback and / or capital reduction scheme of the company. However, this General Permission is not available in case of transfer of shares / debentures, from a Resident to a Non-Resident / Non-Resident Indian, of an entity engaged in any activity in the financial services sector (i.e. Banks, NBFCs, ARCs, CICs, Insurance, infrastructure companies in the securities market such as Stock Exchanges, Clearing Corporations, and Depositories, Commodity Exchanges etc.).

(ii)  Reporting of transfer of shares between residents and non-residents and vice- versa is to be done in Form FC-TRS (enclosed in Annex - 9). The Form FC-TRS should be submitted to the AD Category – I bank, within 60 days from the date of receipt of the amount of consideration.  The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor / transferee, resident in India. The AD Category – I bank, would forward the same to its link office. The link office would consolidate the Form FC-TRS and submit a monthly report to the Reserve Bank⁷.

(iii) The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a KYC check by the remittance receiving AD Category – I bank at the time of receipt of funds. In case, the remittance receiving AD Category – I bank is different from the AD Category - I bank handling the transfer transaction, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the customer to the AD Category – I bank carrying out the transaction along with the Form FC-TRS.

(iv)  AD Category – I banks have been given general permission to open Escrow account and Special account of non-resident corporates for open offers / exit offers and delisting of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI Regulations / provisions of the Companies Act, 1956 will be applicable.

22.  Prior permission of RBI in certain cases for transfer of security

(i)  The following instances of transfer of shares from residents to non-residents by way of sale require Reserve Bank approval:

a) Transfer of shares or convertible debentures of an Indian company engaged in financial services sector (i.e. Banks, NBFCs, Asset Reconstruction Companies,CICs,Insurance, Infrastructure companies in the securities market such as, Stock Exchanges, Clearing Corporations, and Depositories, Commodity Exchanges, etc.).

b) Transactions which attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

c) The activity of the Indian company whose securities are being transferred falls outside the automatic route and the approval of the FIPB has been obtained for the said transfer.

d) The transfer is to take place at a price which falls outside the pricing guidelines specified by the Reserve Bank from time to time.

e) Transfer of equity instruments where the non-resident acquirer proposes deferment of payment of the amount of consideration, prior approval of the Reserve Bank would be required. Further, in case approval is granted for a transaction, the same should be reported in Form FC-TRS, duly certified by the AD Category – I bank, within 60 days from the date of receipt of the full and final amount of consideration.

(ii) The following instances of transfer of shares from residents to non-residents by way of sale or otherwise requires Government approval followed by permission from RBI:

a. Transfer of shares of companies engaged in sectors falling under the Government Route.

b. Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable.

(iii)  A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from Reserve Bank⁸. While forwarding applications to Reserve Bank for approval for transfer of shares by way of gift, the documents mentioned in Annex - 4 should be enclosed. Reserve Bank considers the following factors while processing such applications:

a) The proposed transferee (donee) is eligible to hold such security under Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.

b) The gift does not exceed 5 per cent of the paid-up capital of the Indian company / each series of debentures / each mutual fund scheme.

c) The applicable sectoral cap limit in the Indian company is not breached.

d) The transferor (donor) and the proposed transferee (donee) are close relatives as defined in Section 6 of the Companies Act, 1956, as amended from time to time. The current list is reproduced in Annex - 5.

e) The value of security to be transferred together with any security already transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 25,000 during a calendar year.

f) Such other conditions as stipulated by Reserve Bank in public interest from time to time

23. Conversion of ECB / Lumpsum Fee / Royalty / Import of capital goods by SEZs in to Equity

(i) Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) into shares / preference shares, subject to the following conditions and reporting requirements. 

a) The activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company;

b) The foreign equity after conversion of ECB into equity is within the sectoral cap, if any;

c) Pricing of shares is as per SEBI regulations or erstwhile CCI guidelines in the case of listed or unlisted companies respectively; and

d) Compliance with the requirements prescribed under any other statute and regulation in force.

e) The conversion facility is available for ECBs availed under the Automatic or Approval Route and is applicable to ECBs, due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators

(ii)  General permission is also available for issue of shares / preference shares against lump-sum technical know-how fee, royalty, under automatic route or SIA / FIPB route, subject to pricing guidelines of SEBI / CCI and compliance with applicable tax laws.

(iii) Units in Special Economic Zones (SEZs) are permitted to issue equity shares to non-residents against import of capital goods subject to the valuation done by a Committee consisting of Development Commissioner and the appropriate Customs officials.

(iv)  Reporting

Details of issue of shares against conversion of ECB has to be reported to the Regional Office concerned of the Reserve Bank, as indicated below:

a. In case of full conversion of ECB into equity, the company shall report the conversion in Form FC-GPR to the Regional Office concerned of the Reserve Bank as well as in Form ECB-2 to the Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051, within seven working days from the close of month to which it relates. The words "ECB wholly converted to equity" shall be clearly indicated on top of the Form ECB-2. Once reported, filing of Form ECB-2 in the subsequent months is not necessary.   

b. In case of partial conversion of ECB, the company shall report the converted portion in Form FC-GPR to the Regional Office concerned as well as in Form ECB-2 clearly differentiating the converted portion from the non-converted portion. The words "ECB partially converted to equity" shall be indicated on top of the Form ECB-2. In the subsequent months, the outstanding balance of ECB shall be reported in Form ECB-2 to DSIM.

c.The SEZ unit issuing equity as mentioned in para (iii) above, should report the particulars of the shares issued in the Form FC-GPR.

24. Remittance of sale proceeds

AD Category – I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.

25. Remittance on winding up/liquidation of Companies

AD Category – I banks have been allowed to remit winding up proceeds of companies in India, which are under liquidation, subject to payment of applicable taxes. Liquidation may be subject to any order issued by the court winding up the company or the official liquidator in case of voluntary winding up under the provisions of the Companies Act, 1956. AD Category – I banks shall allow the remittance provided the applicant submits:

i. No objection or Tax clearance certificate from Income Tax Department for the remittance.

ii. Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately provided for.

iii. Auditor's certificate to the effect that the winding up is in accordance with the provisions of the Companies Act, 1956.

iv. In case of winding up otherwise than by a court, an auditor's certificate to the effect that there is no legal proceedings pending in any court in India against the applicant or the company under liquidation and there is no legal impediment in permitting the remittance.

26. Issue of shares by Indian companies under ADR / GDR

i) Depository Receipts (DRs) are negotiable securities issued outside India by a Depository bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs are traded on Stock Exchanges in the US, Singapore, Luxembourg, etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs). In the Indian context, DRs are treated as FDI.

ii) Indian companies can raise foreign currency resources abroad  through the issue of ADRs/GDRs, in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India thereunder from time to time.

iii) A company can issue ADRs / GDRs if it is eligible to issue shares to persons resident outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs.

iv) Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier.

ADRs / GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilisation of the proceeds, the Indian company can invest the funds in:-

a. Deposits with or Certificate of Deposit or other instruments offered by banks who have been rated by Standard and Poor, Fitch, IBCA or Moody's, etc. and such rating not being less than the rating stipulated by Reserve Bank from time to time for the purpose;

b. Deposits with branch/es of Indian Authorised Dealers outside India; and

c. Treasury bills and other monetary instruments with a maturity or unexpired maturity of one year or less.

v) There are no end-use restrictions except for a ban on deployment / investment of such funds in real estate or the stock market. There is no monetary limit up to which an Indian company can raise ADRs / GDRs.

vi)  The ADR / GDR proceeds can be utilised for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance.

vii)  Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions. Voting rights in the case of banking companies will continue to be in terms of the provisions of the Banking Regulation Act, 1949 and the instructions issued by the Reserve Bank from time to time, as applicable to all shareholders exercising voting rights.

viii) Erstwhile OCBs who are not eligible to invest in India and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies.

ix) The pricing of ADR / GDR issues should be made at a price determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.  

x) The pricing of sponsored ADRs/GDRs would be determined under the provisions of the Scheme of issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.  

27. Two-way Fungibilty Scheme

A limited two-way Fungibility scheme has been put in place by the Government of India for ADRs / GDRs. Under this Scheme, a stock broker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors. Re-issuance of ADRs / GDRs would be permitted to the extent of ADRs / GDRs which have been redeemed into underlying shares and sold in the Indian market.

28. Sponsored ADR/GDR issue

An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue is remitted back to India and distributed among the resident investors who had offered their Rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADRs / GDRs.

29. Reporting of ADR/GDR Issues

The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full details of such issue in the Form enclosed in Annex -10, within 30 days from the date of closing of the issue. The company should also furnish a quarterly return in the Form enclosed in Annex - 11, to the Reserve Bank within 15 days of the close of the calendar quarter. The quarterly return has to be submitted till the entire amount raised through ADR/GDR mechanism is either repatriated to India or utilized abroad as per the extant Reserve Bank guidelines.

Section - II: Foreign Portfolio Investments

1. Portfolio Investment Scheme (PIS)

(i)  Foreign Institutional Investors (FIIs) registered with SEBI and Non-resident Indians (NRIs) are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme (PIS).

(ii) The FIIs, which have been granted registration by SEBI, should approach their designated AD Category - I bank (known as Custodian bank), for opening a foreign currency account and / or a Non Resident Special Rupee Account.

(iii) NRIs can approach the designated branch of any AD Category - I bank authorised by the Reserve Bank to administer the Portfolio Investment Scheme for permission to open a NRE/NRO account under the Scheme for routing investments.

2.  Investment by FIIs under PIS

Reserve Bank has given general permission to SEBI registered FIIs/sub-accounts to invest under the PIS. 
(i) Shareholding

(a)  Total shareholding of each FII/sub-account under this Scheme shall not exceed 10 per cent of the total paid-up capital or 10 per cent of the paid-up value of each series of convertible debentures issued by the Indian company.

(b)  Total holdings of all FIIs /sub-accounts put together shall not exceed 24 per cent of the paid-up capital or paid-up value of each series of convertible debentures. This limit of 24 per cent can be increased to the sectoral cap / statutory limit, as applicable to the Indian company concerned, by passing a resolution of its Board of Directors followed by a special resolution to that effect by its General Body.

(c) A domestic asset management company or portfolio manager, who is registered with SEBI as an FII for managing the fund of a sub-account can make investments under the Scheme on behalf of;

i. a person resident outside India who is a citizen of a foreign state, or
ii.a body corporate registered outside India;

Provided, such investment is made out of funds raised or collected or brought from outside through normal banking channel. Investments by such entities shall not exceed 5 per cent of the total paid-up equity capital or 5 per cent of the paid-up value of each series of convertible debentures issued by an Indian company, and shall also not exceed the overall ceiling specified for FIIs.

(ii) Prohibition on investments

(a)  FIIs are not permitted to invest in equity shares issued by an Asset Reconstruction Company.

(b)   FIIs are also not allowed to invest in any company which is engaged or proposes to engage in the following activities:

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

"Real estate business" does not include construction of housing / commercial premises, educational institutions, recreational facilities, city and regional level infrastructure, townships.

3.  Short Selling by FIIs

Foreign Institutional Investors (FIIs) registered with SEBI and sub-accounts of FIIs are permitted to short sell, lend and borrow equity shares of Indian companies. Short selling, lending and borrowing of equity shares of Indian companies shall be subject to such conditions as may be prescribed by the Reserve Bank and the SEBI / other regulatory agencies from time to time. The permission is subject to the following conditions:

a) The FII participation in short selling as well as borrowing / lending of equity shares will be subject to the current FDI policy and short selling of equity shares by FIIs shall not be permitted for equity shares of Indian companies which are in the ban list and / or caution list of the Reserve Bank.

b) Borrowing of equity shares by FIIs shall only be for the purpose of delivery into short sales.

c) The margin / collateral shall be maintained by FIIs only in the form of cash. No interest shall be paid to the FII on such margin/collateral.

4.  Exchange Traded Derivative Contracts

(i)   SEBI registered FIIs are allowed to trade in all exchange traded derivative contracts approved by RBI/SEBI on recognised Stock Exchanges in India subject to the position limits and margin requirements as prescribed by RBI / SEBI from time to time as well as the stipulations regarding collateral securities as directed by the Reserve Bank from time to time. The SEBI registered FII / sub-account may open a separate account under their Special Non-Resident Rupee Account through which all receipts and payments pertaining to trading / investment in exchange traded derivative contracts will be made (including initial margin and mark to market settlement, transaction charges, brokerage, etc.). Further, transfer of funds between the Special Non-Resident Rupee Account and the separate account maintained for the purpose of trading in exchange traded derivative contracts can be freely made. However, repatriation of the Rupee amount will be made only through their Special Non-Resident Rupee Account subject to payment of relevant taxes. The AD Category – I banks have to keep proper records of the above mentioned separate account and submit them to the Reserve Bank as and when required.

(ii) FIIs are allowed to offer foreign sovereign securities with AAA rating as collateral to the recognised Stock Exchanges in India for their transactions in derivatives segment. SEBI approved clearing corporations of stock exchanges and their clearing members are allowed to undertake the following transactions subject to the guidelines issued from time to time by SEBI in this regard:

a.to open and maintain demat accounts with foreign depositories and to acquire, hold, pledge and transfer the foreign sovereign securities, offered as collateral by FIIs;
b.to remit the proceeds arising from corporate action, if any, on such foreign sovereign securities; and
c.to liquidate such foreign sovereign securities if the need arises.

(iii) Clearing Corporations have to report, on a monthly basis, the balances of foreign sovereign securities, held by them as non-cash collaterals of their clearing members to the Reserve Bank⁹. The report should be submitted by the 10th of the following month to which it relates.

5.  Accounts with AD Category – I banks

(i) FIIs/sub-accounts can open a Foreign Currency Account and / or a Special Non-Resident Rupee Account with an AD Category – I bank, for the purpose of investment.
      
(ii) They can transfer sums from the Foreign Currency Account to the Special Non-Resident Rupee Account for making genuine investments in securities in terms of the SEBI (FII) Regulations, 1995. 

(iii) The sums may be transferred from foreign currency account to Special Non-Resident Rupee Account at the prevailing market rate and the AD Category - I bank may transfer repatriable proceeds (after payment of tax) from the Special Non-Resident Rupee Account to the Foreign Currency account.

(iv) The Special Non-Resident Rupee Account may be credited with the sale proceeds of shares / debentures, dated Government securities, Treasury Bills, etc. Such credits are allowed, subject to the condition that the AD Category - I bank should obtain confirmation from the investee company / FII concerned that tax at source, wherever necessary, has been deducted from the gross amount of dividend / interest payable / approved income to the share / debenture / Government securities holder at the applicable rate, in accordance with the Income Tax Act.

(v) The Special Non-Resident Rupee Account may be debited for purchase of shares / debentures, dated Government securities, Treasury Bills, etc., and for payment of fees to applicant FIIs’ local Chartered Accountant / Tax Consultant where such fees constitute an integral part of their investment process.

6. Private placement with FIIs

SEBI registered FIIs have been permitted to purchase shares / convertible debentures of an Indian company through offer/private placement, subject to the ceilings prescribed, i.e. individual FII/sub account -10 per cent and all FIIs/sub-accounts put together - 24 per cent of the paid-up capital of the Indian company or to the sectoral limits, as applicable. Indian company is permitted to issue such shares provided that:

a) in the case of public offer, the price of shares to be issued is not less than the price at which shares are issued to residents;  and

b) in the case of issue by private placement, the price is not less than the price arrived at in terms of SEBI guidelines or guidelines issued by the erstwhile Controller of Capital Issues, as applicable.  Purchases can also be made of compulsorily and mandatorily Convertible Debentures / Right Renunciations / Units of Domestic Mutual Fund Schemes.

7. Reporting of FII investments

(i) An FII may invest in a particular share issue of an Indian company either under the FDI Scheme or the Portfolio Investment Scheme. The AD Category – I banks have to ensure that the FIIs who are purchasing the shares by debit to the Special Non-Resident Rupee Account report these details separately in the Form LEC (FII).

(ii) The Indian company which has issued shares to FIIs under the FDI Scheme (for which the payment has been received directly into company’s account) and the Portfolio Investment Scheme (for which the payment has been received from FIIs' account maintained with an AD Category – I bank in India) should report these figures separately under item no. 5 of Form FC-GPR (Annex - 8) (Post-issue pattern of shareholding) so that the details could be suitably reconciled for statistical / monitoring purposes.

(iii) A daily statement in respect of all transactions (except derivative trade) have to be submitted by the custodian bank in floppy / soft copy in the prescribed format directly to Reserve Bank¹⁰ to monitor the overall ceiling / sectoral cap / statutory ceiling.

8.  Investments by Non-Resident Indians (NRIs)

(i)   NRIs are allowed to invest in shares of listed Indian companies in recognised Stock Exchanges under the PIS. NRIs can invest through designated ADs, on repatriation and non-repatriation basis under PIS route up to 5 per cent of the paid-up capital / paid-up value of each series of convertible debentures of listed Indian companies. The aggregate paid-up value of shares / convertible debentures purchased by all NRIs cannot exceed 10 per cent of the paid-up capital of the company / paid-up value of each series of convertible debentures of the company. The aggregate ceiling of 10 per cent can be raised to 24 per cent, if the General Body of the Indian company passes a special resolution to that effect.

(ii) The NRI investor has to take delivery of the shares purchased and give delivery of shares sold. Short Selling is not permitted.

(iii)  Payment for purchase of shares and/or convertible debentures on repatriation basis has to be made by way of inward remittance of foreign exchange through normal banking channels or out of funds held in NRE/FCNR(B) account maintained in India. If the shares are purchased on non-repatriation basis, the NRIs can also utilise their funds in NRO account in addition to the above.

(iv)  The link office of the designated branch of an AD Category – I bank shall furnish to the Reserve Bank¹¹, a report on a daily basis on PIS transactions undertaken by it, such report can be furnished on-line or on a floppy to the Reserve Bank.

(v)  Shares purchased by NRIs on the stock exchange under PIS cannot be transferred by way of sale under private arrangement or by way of gift (except by NRIs to their relatives as defined in Section 6 of Companies Act, 1956 or to a charitable trust duly registered under the laws in India) to a person resident in India or outside India without prior approval of the Reserve Bank.

(vi)  NRIs are allowed to invest in Exchange Traded Derivative Contracts approved by SEBI from time to time out of Rupee funds held in India on non-repatriation basis, subject to the limits prescribed by SEBI.

9.  Monitoring of investment position by RBI

Reserve Bank monitors the investment position of FIIs/NRIs in listed Indian companies, reported by Custodian/designated AD banks, on a daily basis, in Forms LEC (FII) and LEC (NRI).

10. Caution List

When the total holdings of FIIs/NRIs under the Scheme reach the limit of 2 per cent below the sectoral cap, Reserve Bank will issue a notice to all designated branches of AD Category - I banks cautioning that any further purchases of shares of the particular Indian company will require prior approval of the Reserve Bank. Reserve Bank gives case-by-case approvals to FIIs for purchase of shares of companies included in the Caution List. This is done on a first-come-first-served basis.

11. Ban List

Once the shareholding by FIIs/NRIs reaches the overall ceiling / sectoral cap / statutory limit, the Reserve Bank places the company in the Ban List. Once a company is placed in the Ban List, no FII or NRI can purchase the shares of the company under the Portfolio Investment Scheme.

12. Investments by Overseas Corporate Bodies (OCBs)

With effect from November 29, 2001, OCBs are not permitted to invest under the Portfolio Investment Scheme (PIS) in India. Further, the OCBs which have already made investments under the PIS are allowed to continue holding such shares / convertible debentures till such time these are sold on the stock exchange. OCBs have been de-recognised as a class of investors in India with effect from September 16, 2003.

Section - III: Foreign Venture Capital Investments

Investments by Venture Capital Funds

(i) A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a Scheme floated by such IVCFs subject to the condition that the VCF should also be registered with SEBI.

An IVCU is defined as a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity under the negative list specified by SEBI. A VCF is defined as a fund established in the form of a trust, a company including a body corporate and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996 which has a dedicated pool of capital raised in a manner specified under the said Regulations and which invests in Venture Capital Undertakings in accordance with the said Regulations.

(ii)  FVCIs can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement in units of schemes / funds set up by a VCF. At the time of granting approval, the Reserve Bank permits the FVCI to open a Foreign Currency Account and/or a Rupee Account with a designated branch of an AD Category – I bank.

(iii) The purchase / sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller.

(iv)  AD Category – I banks can offer forward cover to FVCIs to the extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments has to be deducted from the eligible cover to arrive at the actual cover that can be offered.

Section - IV: Other Foreign Investments

1. Purchase of other securities by NRIs

(i) On non-repatriation basis

(a)  NRIs can purchase shares / convertible debentures issued by an Indian company on non-repatriation basis without any limit.  Amount of consideration for such purchase shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE / FCNR(B) / NRO account maintained with the AD Category - I bank.

(b)  NRI can also, without any limit, purchase on non-repatriation basis  dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds. Government of India has notified that NRIs are not permitted to make Investments in Small Savings Schemes including PPF.  In case of investment on non-repatriation basis, the sale proceeds shall be credited to NRO account. The amount invested under the scheme and the capital appreciation thereon will not be allowed to be repatriated abroad.

(ii) On repatriation basis

An NRI can purchase on repatriation basis, without limit, Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds; bonds issued by a public sector undertaking (PSU) in India and shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.

2. Purchase of other securities by FIIs

Foreign Institutional Investors (FIIs) can buy on repatriation basis dated Government securities / treasury bills, listed non-convertible debentures / bonds issued by Indian companies and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognized stock exchange in India. Purchase of debt instruments by FIIs are subject to limits notified by SEBI and the Reserve Bank from time to time.

3. Investment by Multilateral Development Banks (MDBs)

A Multilateral Development Bank (MDB) which is specifically permitted by the Government of India to float rupee bonds in India can purchase Government dated securities.

4. Foreign Investment in Tier I and Tier II instruments issued by banks in India

(i)  FIIs registered with SEBI and NRIs have been permitted to subscribe to the Perpetual Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital instruments (eligible for inclusion as upper Tier II capital), issued by banks in India and denominated in Indian Rupees, subject to the following conditions:

a. Investment by all FIIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 49 per cent of each issue, and investment by individual FII should not exceed the limit of 10 per cent of each issue.

b. Investments by all NRIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 24 per cent of each issue and investments by a single NRI should not exceed 5 percent of each issue.

c. Investment by FIIs in Rupee denominated Debt Capital instruments (Tier II) shall be within the limits stipulated by SEBI for FII investment in corporate debt instruments.

d. Investment by NRIs in Rupee denominated Debt Capital instruments (Tier II) shall be in accordance with the extant policy for investment by NRIs in other debt instruments.

(ii)  The issuing banks are required to ensure compliance with the conditions stipulated above at the time of issue. They are also required to comply with the guidelines issued by the Department of Banking Operations and Development (DBOD), Reserve Bank of India, from time to time.

(iii)  The issue-wise details of the amount raised as Perpetual Debt Instruments qualifying for Tier I capital by the bank from FIIs / NRIs are required to be reported in the prescribed format within 30 days of the issue to the Reserve Bank¹².

(iv)  Investment by FIIs in Rupee denominated Upper Tier II Instruments raised in Indian Rupees will be within the limit prescribed by SEBI for investment in corporate debt instruments. However, investment by FIIs in these instruments will be subject to a separate ceiling of USD 500 million.

(v)  The details of the secondary market sales / purchases by FIIs and the NRIs in these instruments on the floor of the stock exchange are to be reported by the custodians and designated banks respectively, to the Reserve Bank through the soft copy of the Forms LEC (FII) and LEC (NRI).

Part II
Acquisition and Transfer of Immovable Property in India.

1.  Acquisition and Transfer of Immovabe Property in India

1) A person resident outside India who is a citizen of India (NRI¹³) can acquire by way of purchase, any immovable property in India other than agricultural land / plantation property / farm house. He can transfer any immovable property other than agricultural or plantation property or farm house to:

i. A person resident outside India who is a citizen of India, or
ii. A person of Indian origin resident outside India, or
iii. A person resident in India.

2) He may transfer agricultural land / plantation property / farm house acquired by way of inheritance, only to Indian citizens permanently residing in India.

3) Payment for acquisition of property can be made out of:

i. Funds received in India through normal banking channels by way of inward remittance from any place outside India, or

ii. Funds held in any non-resident account maintained in accordance with the provisions of the Foreign Exchange Management Act, 1999 and the regulations made by Reserve Bank from time to time.

4) Such payment cannot be made either by traveller's cheque or by foreign currency notes or by other mode other than those specifically mentioned above.

5) A person resident outside India who is a person of Indian Origin (PIO¹⁴) can acquire any immovable property in India other than agricultural land / farm house / plantation property:

i) By way of purchase out of funds received by inward remittance through normal banking channels or by debit to his NRE / FCNR(B) / NRO account.

ii) Such payments cannot be made either by traveller’s cheque or by foreign currency notes or by other mode other than those specifically mentioned above.

iii) By way of gift from a person resident in India or a NRI or a PIO.

6) A PIO may acquire any immovable property in India by way of inheritance from a person resident in India or a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force or FEMA regulations at the time of acquisition of the property.

7)  A PIO may transfer agricultural land / plantation property / farmhouse in India acquired by way of inheritance, by way of sale or gift to person resident in India who is a citizen of India.

8)  A PIO may transfer any immovable property other than agricultural land / Plantation property / farmhouse in India:

i. By way of sale to a person resident in India.
ii. By way of gift to a person resident in India or a Non-Resident Indian or a PIO.

2. Purchase / Sale of Immovable Property by Foreign Embassies / Diplomats / Consulate General

Foreign Embassy / Consulate as well as Diplomatic personnel in India are allowed to purchase/ sell immovable property in India other than agricultural land / plantation property / farm house provided (i) clearance from Government of India, Ministry of External Affairs is obtained for such purchase / sale, and (ii) the consideration for acquisition of immovable property in India is paid out of funds remitted from abroad through normal banking channels.

3.   Acquisition of Immovable Property for carrying on a permitted activity

A branch, office or other place of business, (excluding a liaison office) in India of a foreign company established with requisite approvals wherever necessary, is eligible to acquire immovable property in India which is necessary for or incidental to carrying on such activity provided that all applicable laws, rules, regulations or directions in force are duly complied with. The entity / person concerned is required to file a declaration in the Form IPI (Annex - 12) with the Reserve Bank, within ninety days from the date of such acquisition. The non-resident is eligible to transfer by way of mortgage the said immovable property to an AD Category – I bank as a security for any borrowing.

4.  Repatriation of sale proceeds

(i)  In the event of sale of immovable property other than agricultural land / farm house / plantation property in India by NRI / PIO, the authorised dealer will allow repatriation of sale proceeds outside India provided:

a) the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of FEMA Regulations;

b) the amount to be repatriated does not exceed (a) the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident Account or (b) the foreign currency equivalent as on the date of payment, of the amount paid where such payment was made from the funds held in Non-Resident (External) Rupee Account for acquisition of the property; and

c) In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

(ii)  In the case of sale of immovable property purchased out of Rupee funds, AD  Category – I banks may allow the facility of repatriation of funds out of balances held by NRIs / PIO in their Non-Resident Rupee (NRO) accounts up to USD 1 million per financial year, subject to production of undertaking by the remitter and a certificate from the Chartered Accountant in the formats prescribed by the CBDT.

5. Prior permission to citizens of certain countries for acquisition or transfer of immovable property in India

(i)  No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, whether resident in India or outside India, shall acquire or transfer immovable property in India, other than lease, not exceeding five years without prior permission of the Reserve Bank.

(ii)  Foreign nationals of non-Indian origin resident outside India are not permitted to acquire any immovable property in India unless such property is acquired by way of inheritance from a person who was resident in India. Foreign nationals of non-Indian origin who have acquired immovable property in India by way of inheritance or purchase with the specific approval of the Reserve bank cannot transfer such property without prior permission of the Reserve Bank.

Part III
Establishment of Branch / Liaison / Project Offices in India

1. Application to RBI

Companies incorporated outside India, desirous of opening a Liaison / Branch Office in India have to make an application in Form FNC-1 (Annex - 13) to the Reserve Bank¹⁵, along with the following documents:

• English version of the Certificate of Incorporation / Registration or Memorandum & Articles of Association attested by Indian Embassy / Notary Public in the Country of Registration.

• Latest Audited Balance Sheet of the applicant entity.

2.  Liaison Office

Companies which are incorporated outside India can establish Liaison Office in India with the specific approval of the Reserve Bank. A Liaison Office (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. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office of the Reserve Bank under whose jurisdiction the office is set up. A Liaison Office can undertake the following activities in India:

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

Liaison / representative offices have to file Annual Activity Certificates from the Chartered Accountants to the Regional Office of the Reserve Bank.

3. Liaison Office of foreign Insurance Companies

Foreign Insurance companies can establish Liaison Offices in India after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).

4. Branch Offices

1)  Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies and undertake the following activities in India:

i. Export / Import of goods.^16
ii.Rendering professional or consultancy services.
iii.Carrying out research work, in areas in which the parent company is engaged.
iv.Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v. Representing the parent company in India and acting as buying / selling agent in India.
vi. Rendering services in Information Technology and devel­opment of software in India.
vii. Rendering technical support to the products sup­plied by parent/group companies.

2) Retail trading activities of any nature is not allowed for a Branch Office in India.

3) A Branch Office is not allowed to carry out manufacturing, processing activities in India, directly or indirectly.

4) Branch Offices are permitted to acquire property for their own use and to carry out the permitted / incidental activities but not for leasing or renting out the property.However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China are not allowed to acquire immovable property in India even for a Branch Office. These entities are allowed to lease such property for a period not exceeding five years. Entities from Nepal are allowed to establish only Liaison Offices in India.

5) Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.

6) Branch Offices have to submit Annual Activity Certificates from Chartered Accountants to the Reserve Bank.

5. Branch Office in Special Economic Zones (SEZs)

(i) Reserve Bank has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to the following conditions:

a) such units are functioning in those sectors where 100 per cent FDI is permitted;
b) such units comply with part XI of the Companies Act,1956 (Section 592 to 602);
c) such units function on a stand-alone basis.

(ii) In the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an AD Category – I bank with the documents mentioned in paragraph 11 ("Closure of Office") except the copy of the letter granting approval by the Reserve Bank.

6. Branches of Banks

Foreign banks do not require separate approval under FEMA, for opening branch office in India. Such banks are required to obtain necessary approval under the provisions of the Banking Regulation Act, 1949, from Department of Banking Operations & Development, Reserve Bank of India.

7. Project Offices

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

i. the project is funded directly by inward remittance from abroad; or
ii. the project is funded by a bilateral or multilateral International Financing Agency; or
iii. the project has been cleared by an appropriate authority; or
iv. a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.

However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank for approval.

8.Opening of Foreign Currency Account

AD Category – I banks can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:

i. The Project Office has been established in India, with the general / specific permission of Reserve Bank, having the requisite approval from the concerned Project Sanctioning Authority.

ii. The contract, under which the project has been sanctioned, specifically provides for payment in foreign currency.

iii. Each Project can open two Foreign Currency Accounts.

iv. The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the Project Sanctioning Authority, and remittances from parent/group company abroad or bilateral / multilateral international financing agency.

v. The responsibility of ensuring that only the approved debits and credits are allowed in the Foriegn Currency Account shall rest solely with the branch concerned of the AD. Further, the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD banks.

vi. The Foreign Currency account has to be closed at the completion of the Project.

9.Intermittent remittances by Project Offices in India

(i) AD Category – I bank can permit intermittent remittances by Project Offices pending winding up / completion of the project provided they are satisfied with the bonafides of the transaction, subject to the following:

a) The Project Office submits an Auditors' / Chartered Accountants’ Certificate to the effect that sufficient provisions have been made to meet the liabilities in India including Income Tax, etc.

b) An undertaking from the Project Office that the remittance will not, in any way, affect the completion of the Project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance from abroad.

(ii) Inter-Project transfer of funds requires prior permission of the concerned Regional Office of the Reserve Bank under whose jurisdiction the Project Office is situated.

10. General conditions

(i) Partnership / Proprietary concerns set up abroad are not allowed to establish Branch /Liaison Offices in India.

(ii) Branch / Liaison / Project Offices are allowed to open non-interest bearing current accounts in India. Such Offices are required to approach their Authorised Dealers for opening the accounts.

(iii) Transfer of assets of Liaison / Branch Office to subsidiaries or other Liaison/Branch Offices is allowed with specific approval of the Central Office of the Reserve Bank

11. Closure of Offices

(i) At the time of winding up of the Liaison Offices, the company has to approach the respective Regional Office of the Reserve Bank with the following documents:

a) Copy of the Reserve Bank’s permission for establishing the Office in India
b)  Auditor’s certificate -

1) indicating the manner in which the remittable amount has been arrived and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets;

2) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc. of the branch / office have been either fully met or adequately provided for;

3) confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India.

c) No-objection or Tax clearance certificate from Income-tax authority for the remittance;

d) Confirmation from the applicant that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance;

e) Once RBI’s Regional Office grants approval, AD Category – I banks can allow remittance of surplus; and

f) At the time of closure of Branch Offices, the entities have to approach the Central Office of the Reserve Bank for approval, with the same set of documents as mentioned above.

Part IV
Investment in Partnership Firm / Proprietary Concern

1.Investment in Partnership Firm / Proprietary Concern

A Non-Resident India¹⁷(NRI) or a Person of Indian Origin¹⁸ (PIO) resident outside India can invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided;

i. Amount is invested by inward remittance or out of NRE / FCNR(B) / NRO account maintained with Authorised Dealers / Authorised banks.

ii. 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.

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

2.Investments with repatriation benefits

NRIs / PIO may seek prior permission of Reserve Bank¹⁹ for investment in sole proprietorship concerns / partnership firms with repatriation benefits. The application will be decided in consultation with the Government of India.

3. Investment by non-residents other than NRIs / PIO

A person resident outside India other than NRIs / PIO may make an application and seek prior approval of Reserve Bank²⁰, for making investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India.

4. Restrictions

An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business (i.e. dealing in land and immovable property with a view to earning profit or earning income therefrom) or engaged in Print Media.

¹ "Shares" mentioned in this Master Circular means equity shares, "convertible debentures" means fully and mandatorily convertible debentures and "preference shares" means fully and mandatorily convertible preference shares [cf. A. P. (DIR Series) Circular Nos. 73 & 74 dated June 8, 2007]

² As per Notification no. FEMA 1/2000-RB dated May 3, 2000

³ As per Notification no. FEMA 20/2000-RB dated May 3, 2000

⁴ A "person" is defined under FEMA (Section 2 u) as:

(a) an individual,
(b) a Hindu undivided family,
(c) a company,
(d) a firm,
(e) an association of persons or a body of individuals, whether incorporated or not,
(f) every artificial juridical person, not falling within any of the preceding sub-clauses, and
(g) any agency, office or branch owned or controlled by such person;

• “person resident in India” means—[As per FEMA Sec 2( v)]

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—
            (A)   a person who has gone out of India or who stays outside India, in either case—
                       (a)   for or on taking up employment outside India, or
                       (b)   for carrying on outside India a business or vocation outside India, or
                       (c)   for any other purpose, in such circumstances as would indicate his intention to stay outside India for an  uncertain period;
            (B)   a person who has come to or stays in India, in either case, otherwise than—
                       (a)   for or on taking up employment in India, or
                       (b)   for carrying on in India a business or vocation in India, or
            (c)  for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
(ii)  any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

•“person resident outside India” means a person who is not resident in India; [As per FEMA Sec 2(w)].

⁵ Applications to be addressed to the Chief General Manager-in-Charge,  Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai

⁶ Addressed to the Advisor, Balance of Payment Statistical Division, Department of Statistics and Information Management, Reserve Bank of India, C9, 8th Floor, Bandra-Kurla Complex, Bandra (E), Mumbai – 400051.

⁷ To the Chief General Manager-in-Charge,  Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai

⁸ Addressed to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, 11th floor, Fort, Mumbai 400 001 along with the documents prescribed in Annex-4.

⁹ Addressed to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai.

¹⁰ Addressed to the Chief General Manager- in-Charge, Foreign Exchange Department, Reserve Bank of India, Foreign Investment Division, Central Office, Central Office Building, Mumbai 400 001.

¹¹ Addressed to the Chief General Manager- in-Charge, Foreign Exchange Department, Reserve Bank of India, Foreign Investment Division, Central Office, Central Office Building, Mumbai 400 001.

¹² Addressed to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Foreign Investment Division, Central Office, Central Office Building, Mumbai 400 001.

¹³ It is clarified that a person resident outside India, who is a citizen of India is treated as NRI for the purpose of this part of the Circular.

¹⁴ ‘A person of Indian origin' means an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who

(i) at any time, held Indian passport; or
(ii) who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955);

¹⁵ Addressed to the Chief General Manager-in- Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai- 400 001.

¹⁶ Procurement of goods for export and sale of goods after import are allowed only on wholesale basis.

¹⁷ 'Non-Resident Indian (NRI)' means a person resident outside India who is a citizen of India or is a person of Indian origin;

¹⁸ 'Person of Indian Origin' means a citizen of any country other than Bangladesh or Pakistan or Sri Lanka, if
a) he at any time held Indian passport; or
b) he or either of his parents or any of his grand - parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
c) the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b);

¹⁹ & ²⁰ Addressed to the Chief General Manager-in-Charge , Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai