RBI/2004-05/6
Master Circular No. / 6/2004-05

July 1, 2004

To

All Authorised Dealers in Foreign Exchange

This Master circular covers the following areas.

1. Foreign Investments in Indian companies. In terms of Section 6(3)(b) of Foreign Exchange Management Act. 1999 Reserve Bank regulates transfer or issue of any security by a person resident outside India read with Notification No. FEMA 20/2000-RB dated May 3,2000.
2. Acquisition of Immovable property. In terms of Section 6(3)(i) of Foreign Exchange Management Act. 1999 Reserve Bank regulates acquisition or transfer of immoveable property in India other than a lease not exceeding 5 years , by a person resident outside India read with Notification No. FEMA 21/ 2000-RB dated May 3,2000.
3. Investment in capital of partnership firms or proprietary concern. In terms of Section 2(h) of Section 47 of Foreign Exchange Management Act. 1999, Reserve Bank regulates investments by a person resident outside India by a partnership firm or proprietary concern read with Notification No. FEMA 24/2000-RB dated May 3, 2000.

2. This Master Circular consolidates the existing instructions in respect of above areas in one place. The list of underlying circulars/notifications are set out in Annex -1.

3. As recommended by the Committee on Procedures and Performance Audit on Public Services (CPPAPS) (Chairman : Shri S. S. Tarapore) set up by the Reserve Bank, this Master Circular is being issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2005 and be replaced by an updated Master Circular on the subject.

Yours faithfully,

List of Circulars/Notifications which have been consolidated in this Master Circular on Foreign Investments in India / Acquisition of Immoveable property in India and investments in proprietary /partnership firms

Investments into India is not permissible in the following cases

1. Business of chit fund, or
2. Nidhi 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. Retail Trading
7. Atomic Energy
8. Lottery Business
9. Gambling and Betting
10. Housing and Real Estate business
11. Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations(other than Tea plantations)

3. 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 list of the activities requiring the approval of the Government is given in Annex-A (A) to Schedule 1 to FEMA Notification No 94 and details of the activities/sectors which are covered under the automatic route is given as Annexure-B to the said Schedule. The Automatic Route is not open for those non-resident investors who have/had a previous financial/technical/ trademark collaboration in an existing domestic company engaged in the same or allied activity. If the activity or manufacturing item of the issuer company requires an Industrial License under the provisions of the Industries (Development and Regulation) Act, 1951 or under the locational policy notified by Government of India under the Industrial Policy Resolution 1991 or the investment is sought in excess of the prescribed sectoral limits Automatic Route is not available and in such cases, specific approval of FIPB would be required.

A person resident outside India (other than a citizen of Pakistan, Sri Lanka or Bangladesh) or an incorporated entity outside India, (other than an entity 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

5.1 The Indian companies also have general permission to issue partly convertible debentures/ partly convertible preference shares subject to certain conditions. Companies can issue NCDs only to NRIs/PIO by means of a public issue only. The coupon rate on partly convertible preference shares/partly convertible debentures should not exceed SBI’s prime lending rate plus 300 basis points.

5.2 Trading 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, as mentioned in Annexure `B' to Notification No. FEMA 94/2003-RB dated 18^th June 2003.

5.3 A company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annexure A (A) to Notification No.94, 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, and
3. It complies with the ceilings specified in Annexure B to Notification No.94.

5.4 An Export Oriented Unit or a unit in Free Trade Zone or in Export Processing Zone or in a 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 specified in Annexure B to Notification No. 94.

General permission is also available to Indian companies to issue Right/Bonus shares subject to certain conditions. As clarified in terms of AP DIR(SERIES) Circular No 14 dated 16^th September 2003, entitlement of rights shares is not automatically available to investors who have been allotted such shares as OCBs. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However, bonus shares can be issued to OCBs.

Where a Scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company may issue shares to the shareholders of the transferor company, resident outside India subject to ensuring that the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank. The transferor company or the transferee or new company should not be engaged in activities prohibited in terms of FDI policy viz agriculture, plantation or real estate business or trading in TDRs.

A company may issue shares under the Employees Stock Option Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, directly or through a Trust subject to the condition that the scheme has been drawn in terms of relevant regulations issued by the Securities Exchange Board of India; and face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company.

6.4 Issue of shares by Indian companies under ADR/GDR

6.4.1 An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:

• the ADRs/GDRs are issued 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 Central Government thereunder from time to time
• The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and
• Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations.

These instruments are issued by a Depository abroad and listed in the overseas stock exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually required in India. There are no end use restrictions except for a ban on deployment/ Investment of these funds in Real Estate and the Stock Market. There is no limit upto which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy.

6.4.2 The ADR/GDR can be issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager of the issue. The Indian company will issue its rupee denominated shares in the name of the Overseas Depository and will keep in the custody of the domestic Custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic Custodian, the Depository will issue ADRs/GDRs abroad.

6.4.3 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 the shares from the market for conversion into ADRs/GDR. Re-issuance of ADRs/GDR would be permitted to the extent of ADsRs/GDRs which have been redeemed into underlying shares and sold in the domestic market.

6.4.4 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 foreign currency accounts in India by the shareholders who have tendered such shares for conversion into ADR/GDR.

6.4.5 The ADR/GDR/FCCB proceeds may be utilised in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public in view of their strategic importance.

ADs have been permitted to allow Indian companies to prepay the existing FCCB subject to certain conditions.

6.4.6 Reporting of such Issues

The Indian company issuing shares shall furnish to the Reserve Bank, full details of such issue in the form specified in Annexure C to Notification No.FEMA 20/2000-RB dated May 3,2000 within 30 days from the date of closing of the issue .The company should also furnish a quarterly return in the form specified in Annexure D to Reserve Bank within 15 days of the close of the calendar quarter.

7.1 General permission has been granted to non-residents/NRIs for transfer of shares and convertible debentures of an Indian company as under:-

• 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); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged.
• NRI or OCB may transfer by way of sale or gift the shares or convertible debentures held by him or it to another non-resident Indian; provided transferee has obtained prior permission of Central Government to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged.
• The person resident outside India may transfer any security to a person resident in India by way of gift.
• A person resident outside India may sell the shares and convertible debentures of an Indian company on a recognised Stock Exchange in India through a registered broker.

A person resident in India who proposes to transfer any share or convertible debenture of an Indian company by way of sale or gift to a person resident outside India will have to obtain prior approval of FIPB, Ministry of Finance & Company Affairs, Govt of India followed by permission from RBI. The above two stage approval are applicable even when the transfer is made on non-repatriation basis. A person resident outside India holding shares/convertible debentures of an Indian company may transfer by way of sale to a person resident in India by obtaining prior permission from RBI in form TS 1.

Price of shares issued to persons resident outside India under Schedule-I, would be worked out on the basis of SEBI guidelines in case of listed shares. In other cases valuation of shares would be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.

An Indian company issuing shares or convertible debentures under bonus, rights, amalgamation and stock option in accordance with these Regulations should submit to Reserve Bank the details of advance remittance, not later than 30 days from the date of receipt of the amount of consideration , giving details regarding

• Name and address of the foreign investors
• Date of receipt of funds and their rupee equivalent
• Name and address of the authorised dealer through whom the funds have been received, and
• Details of the Government approval, if any

After the issue of shares the company should file a report in Form FC-GPR not later than 30 days from the date of issue of shares with the Regional Office of RBI where the registered office of the company is situated.

Reserve Bank may, permit an Indian company issuing shares to persons resident outside India under Schedule I to FEMA Notification No. 20 (i.e. under the FDI scheme) , to retain the subscription amount in a foreign currency account, subject to such terms and conditions as it may stipulate.

10.1 Foreign Institutional Investors registered with SEBI and Non-resident Indians are eligible to purchase the shares and convertible debentures under the Portfolio Investment Scheme. The FII should apply to the designated AD who may then grant permission to FII for opening a foreign currency account and/or a Non Resident Rupee Account .

NRIs should apply to the concerned AD designated bank for permission to open a NRE/NRO account with its designated branch.

10.2.1 In the case of FIIs, the total holding of each FII/SEBI approved sub account shall not exceed 10% of the total paid up capital or 10% of the paid up value of each series of convertible debentures issued by an Indian company and the total holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures. This limit of 24% can be increased to the sectoral cap/statutory limit as applicable to the Indian company concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body.

10.2.2 The FIIs are also permitted to trade in all exchange traded derivative contracts subject to certain limits. ADs can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments. FIIs are not permitted to invest in Print Media Sector through FDI or PIS routes. Such investment by FII requires prior approval of Government of India, Foreign Investment Promotion Board and Ministry of Information & Broadcasting.

10.2.3 Registered FIIs have been permitted to purchase shares/convertible debentures of an Indian company through offer / private placement. This is subject to applicable ceiling as indicated in Schedule 2 to Notification No. FEMA 20/2000-RB dated May 3,2000. It is clarified that a FII may invest in a particular issue of an Indian company either under Schedule 1 or Schedule 2. The ADs may ensure that the FIIs who are purchasing the shares by debit to the special rupee accounts report these details separately in the LEC (FII ) returns. The company who has issued the shares to the FIIs under Schedule 1 (FDI) ( for which the payment has been received directly into company’s account ) and under Schedule 2 ( for which the payment has been received from FIIs account maintained with Authorised Dealer in India ) should report these figures separately under item 4(b) of the FC-GPR return so that the details could be suitably reconciled for statistical / monitoring purposes.

10.3 The FII shall restrict allocation of its total investment between equities and debt including dated Government Securities and Treasury Bills in the Indian Capital Market in the ratio of 70:30. The FII can also form a 100% Debt Fund and get registered with SEBI for investment in debt investments. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard.

In the case of NRIs under PIS it is to be ensured that the paid-up value of shares/ convertible debentures purchased by an NRI under PIS route should not exceed 5% of the paid up capital/ paid up value of each series of debentures. The aggregate paid-up value of shares/ convertible debentures purchased by all NRIs should not exceed 10% of the paid-up capital of the company/paid-up value of series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company concerned passes a special resolution to that effect. The NRI investor should take delivery of the shares purchased and give delivery of shares sold. Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis and by inward remittance or out of funds held in NRE/FCNR/NRO account of the NRI concerned, maintained in India where shares/debentures are purchased on non-repatriation basis.

10.5. Reporting

The link office of the designated branch of an AD shall furnish to the CGM, RBI, ECD, CO, Mumbai a report on a daily basis on PIS transactions undertaken by it, such report to be furnished on-line or on a floppy in a format supplied by RBI.

10.6. NRI may invest in Exchange Trade Derivative Contracts approved by SEBI from time to time out of INR funds held in India on non-repatriation basis subject to the limits prescribed by SEBI. NRIs may also purchase on repatriation basis, Govt dated securities, Treasury bills, units of domestic Mutual funds bonds issued by public sector undertakings and shares in public sector enterprise being divested by the Govt of India.

11. With effect from November 29, 2001, OCBs are not permitted to invest under the PIS in India. Further, the OCBs that have already made investments under the Portfolio Investment Scheme, may continue to hold such shares/convertible debentures till such time these are sold on the stock exchange.

12.1 There is no limit on NRI purchasing shares/ convertible debentures issued by an Indian company on non-repatriation basis whether by public issue or private placement. Amount of consideration for such purchase shall be paid by inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR/NRO account maintained with the AD.

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.

As notified by Government NRIs are not permitted to make Investments in Small Savings Schemes including PPF.

12.2 Foreign Institutional Investors can buy dated securities/ treasury bills, 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 recognised stock exchange in India.

12.3 NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in Indian Securities on repatriation basis subject to the condition that the amount of consideration for such purchase on repatriation basis shall be paid only by way of inward remittance in free foreign exchange through normal banking channels or by debit to their NRE/ FCNR(B) accounts.

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 shall not be allowed to be repatriated abroad.

A SEBI registered Foreign Venture Capital Investor (FVCI) with general permission from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or in a Venture Capital Fund( VCF) or in a Scheme floated by such VCFs subject to the condition that the VCF should also be registered with SEBI. They can purchase equity/equity linked instruments/ debt/debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement or in units of schemes/ funds set up by a VCF. RBI, on application, may permit a FVCI to open a foreign currency account or rupee account with a designated branch of an authorised dealer. The purchase/ sale of shares, debentures, units can be at a price that is mutually acceptable to the buyer and the seller /issuer. ADs are also authorised to offer forward cover to FVCIs to the extent of total inward remittance net of investments liquidated.

1.1 A person resident outside India who is a citizen of India (NRI) can acquire by way of purchase any immovable property in India other than agricultural/ plantation /farm house.He may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India or a person resident in India . He may however transfer, agricultural land/ plantation property/ farm house only to Indian citizens permanently residing in India.

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

1.3 A PIO may transfer any immoveable property other than agricultural land/Plantation property/farmhouse in India

1.4 A PIO may transfer agricultural Land/ Plantation property /farmhouse in India by way of sale or gift to person resident in India who is a citizen of India

Foreign Embassy/Diplomat/Consulate General has been 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 banking channel.

A person resident outside India who has a branch, office or other place of business, (excluding a liaison office) for carrying on his business activity with requisite approvals, in India may acquire an immovable property in India which is necessary for or incidental to carrying on such activity provided that all applicable laws, rules, regulations or directions for the time being in force are duly complied with. The entity/concerned person would have to file a declaration in the form IPI 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 authorised dealer as a security for any borrowing.

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;

1. 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;
2. 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 account for acquisition of the property.
3. In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.
4. In the case of sale of immoveable property purchased out of Rupee funds, ADs may allow the facility of repatriation of funds out of balances held by NRIs/PIO in their Non-resident Rupee( NRO) accounts upto US$ 1 mio per year , provided that the property has been held for a period not less than 10 years or for a combined period of 10 years partly as property and as sale proceeds in NRO account and subject to production of undertaking by the remitter and a certificate from the Chartered Accountant in the formats prescribed by the CBDT.

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

5.2 Foreign national of non-Indian origin resident outside India are not permitted to acquire any immoveable property in India unless such property is acquired by way of inheritance.

5.3 Foreign Nationals of non Indian origin who have acquired immovable property in India with the specific approval of the Reserve Bank cannot transfer such property without prior permission of the Reserve Bank.

A non-resident Indian or a person of Indian origin resident outside India may invest by 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 AD
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.
3. Amount invested shall not be eligible for repatriation outside India

2. Investment in sole proprietorship concern/ partnership firm with repatriation benefits.

NRIs/PIO may invest in sole proprietorship concerns/ partnership firms with repatriation benefits with the approval of Government /RBI.

No person resident outside India other than NRIs/PIO shall make any investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India provided that the RBI may, on an application made to it, permit a person resident outside India to make such investment subject to such terms and conditions as may be considered necessary.

In terms of Regulation 4(b) and (e) of RBI Notification No.FEMA 24/2000-RB dated May 3,2000 an NRI or PIO cannot invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or engaged in Print Media.

(as amended vide Notification No. FEMA 94-RB dated June 18, 2003)

1. Domestic Airlines
2. Petroleum Sector (except for private sector oil refining)
3. Investing companies in Infrastructure & Services Sector
4. Defence and Strategic Industries
5. Atomic Minerals
6. Print Media
7. Broadcasting
8. Postal services
9. Courier Services
10. Establishment and Operation of satellite
11. Development of Integrated Township
12. Tea Sector

* Govt of India vide Press Note No.2 (2004 Series) has raised the FDI limit in Private Sector banks from 49% to 74%. RBI is yet to issue Notification.