Foreign Investment 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 of India 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.

Foreign investment is freely permitted in almost all sectors. Foreign Direct Investments (FDI) can be made under two routes—Automatic Route and Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from RBI 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. Entry route for foreign investors as well as sector-specific investment limits in India are given in Annex-2.

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— www.dipp.nic.in. 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 RBI.

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 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

(v) Trading in Transferable Development Rights (TDRs).

It is clarified that Real Estate Business does not include development of townships, construction of residential/commercial premises, roads or bridges. It is further clarified that partnership firms/proprietorship concerns having investments as per FEMA regulations are not allowed to engage in Print Media sector.

In addition to the above, investment in the form of FDI is also prohibited in certain sectors such as:

(i) Retail Trading

(ii) Atomic Energy

(iii) Lottery Business

(iv) Gambling and Betting

(v) 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)

A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India, (other than an entity incorporated in Pakistan or Bangladesh) can invest in India, subject to the FDI Policy of the Government of India.

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% of paid-up capital of the Indian company/SSI Unit. An SSI Unit can issue equity shares / fully convertible preference shares / fully convertible debentures more than 24% of its paid-up capital if:

(a) It has given up its small scale 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-2.

An SSI Unit, which is 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, issue of shares / convertible debentures / preference shares exceeding 24% of the paid-up capital upto the sectoral caps specified in Annex-2.

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

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) Foreign investment upto 49% of the paid up capital, is allowed in these companies with a separate Foreign Direct Investment (FDI) cap of 26% and Foreign Institutional Investment (FII) cap of 23%;

ii) FDI will be allowed with specific prior approval of FIPB; and

iii) FIIs can invest only through purchases in the secondary market.

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 or by debit to the NRE/ FCNR (B) accounts of the NRIs.

FEMA provisions allow Indian companies to freely issue Right / Bonus shares to existing non-resident share-holders, 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 right 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.

As such, entitlement of rights shares is not automatically available to Overseas Corporate Bodies (OCBs). OCBs have been de-recognised as a class of investors with effect from September 16, 2003. Therefore, Companies desiring to issue rights shares to such erstwhile OCBs will have to take specific prior permission from RBI.

However, bonus shares can be issued to erstwhile OCBs.

Existing non-resident shareholders are allowed to apply for issue of additional shares / convertible debentures / preference shares over and above their rights entitlements. The investee company can allot the additional rights shares out of un-subscribed shares, 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.

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 condition that:

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

(ii) The transferor company or the transferee or new company is not engaged in activities which are prohibited in terms of FDI policy.

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, other than citizens of Pakistan. Shares under ESOPs can be issued directly or through a Trust subject to the condition that:

(i) The scheme has been drawn in terms of relevant regulations issued by the Securities and Exchange Board of India; and

(ii) 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.

If the company is not listed, it has to follow the provisions of the Companies Act, 1956. The Indian company can issue ESOPs to employees who are resident outside India, other than citizens of Pakistan and Bangladesh. The issuing company is required to report the details of such issues to the concerned Regional Office of the Reserve Bank, within 30 days from the date of issue of shares under ESOPs.

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 inflow to the Reserve Bank not later than 30 days from the date of receipt. Details to be reported are:

(i) Name and address of the foreign investor/s

(ii) Date of receipt of funds in foreign currency and its rupee equivalent

(iii) Name and address of the Authorised Dealer through whom the funds have been received, and

(iv) Details of Government approval for the investment, if any.

After issue of shares/convertible debentures/preference shares, the Indian company has to file Form FC-GPR enclosed in Annex-6, not later than 30 days from the date of issue. The form can be downloaded from the RBI website http://www.rbi.org.in/Scripts/BS_ViewFemaForms.aspx.

Part A of Form FC-GPR has to be duly filled up and signed by the Authorised Signatory and submitted to the Authorised Dealer of the company, who will forward it to the Reserve Bank.

While forwarding the Form, the Authorised Dealer will enclose a KYC Report on the foreign investor. Along with Part A of FC-GPR, the following documents has to be attached by the company:

(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 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 Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Both the above reports have to be submitted to the concerned Regional Office of RBI under whose jurisdiction the registered office of the company is situated.

Part-B of FC-GPR should be filed on an annual basis with the Reserve Bank. This filing has to be done in the month of June every year, for all outstanding investment by way of FDI as well as Portfolio / other investments and by way of re-invested earnings for the previous April to March period. [For example, all Indian companies who have received FDI, Portfolio investments, other investments (such as bonds, debentures etc.) from foreign investors during the period April 2006 to March 2007, have to report in Part B of Form FC-GPR in the month of June 2007, along with their retained earnings during the period.]

The above mentioned three stage reporting mechanism has to be followed wherever there is inflow of funds through normal banking channels or debit to NRE/FCNR account for investment purposes. Moreover, 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 has to be reported in Form FC-GPR.

Price of shares issued to persons resident outside India under the FDI Scheme, shall be worked out 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.

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 RBI.

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 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).
• NRIs and erstwhile OCBs may transfer by way of sale or gift the shares or convertible debentures held by him or it to another NRI.

In both the above cases, if the transferee has previous venture or tie-up in India 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 to International Financial Institutions (i.e. ADB, IFC, CDC, DEG) and transfer of shares to Indian company engaged in Information Technology Sector.

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

Reporting of transfer of shares between residents and non-residents and vice versa is to be done in Form FC-TRS (enclosed in Annex-7). This Form needs to be submitted to the AD Bank, which will forward the same to its link office. The link office will consolidate the form and submit a report to RBI.

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 Bank. Reserve Bank considers the following factors while processing such applications:

• The transferee (donee) is eligible to hold such security under Schedule 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
• 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.
• The applicable sectoral cap / foreign direct investment (FDI) limit in the Indian company is not breached.
• The transferor (donor) and the transferee (donee) are close relatives as defined in section 6 of the Companies Act, 1956, as mended from time to time. The current list is reproduced in Annex 5.
• 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.
• Such other conditions as stipulated by Reserve Bank in public interest from time to time.

The following instances of transfer of shares from residents to non-residents by way of sale requires RBI approval:

• Transfer of shares or convertible debentures of an Indian company engaged in financial sector (i.e. Banks, NBFCs, Asset Reconstruction Companies and Insurance),
• Transactions which attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

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:

• Transfer of shares of companies engaged in sectors falling under the Government Approval Route,
• Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable.

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.

1. 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,
2. The foreign equity after conversion of ECB into equity is within the sectoral cap, if any,
3. Pricing of shares is as per SEBI regulations /erstwhile CCI guidelines/ in the case of listed/unlisted companies as the case may be.
4. Compliance with the requirements prescribed under any other statute and regulation in force.

The conversion facility is available for ECBs availed under the Automatic or Approval Route. This would also be applicable to ECBs irrespective of whether due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators. 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.

Units in Special Economic Zones (SEZs) are permitted to issue equity shares to non-residents against import of capital goods subject to the following :-

1. The valuation should be verified by a Committee consisting of Development Commissioner and the appropriate Customs officials.
2. The SEZ unit issuing equity in the above manner should report the particulars of the shares issued in the Form FC-GPR.

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

1. In case of full conversion of ECB into equity, the company shall report the conversion in form FC-GPR to the concerned Regional Office of the Reserve Bank as well as in form ECB-2 submitted to the Department of Statistical Analysis and Computer Services (DESACS), 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 ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary.
2. In case of partial conversion of ECB, the company shall report the converted portion in form FC-GPR to the concerned Regional Office as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words 'ECB partially converted to equity' shall be indicated on top of the ECB-2 form. In the subsequent months, the outstanding portion of ECB shall be reported in ECB-2 form to DESACS.

An authorised dealer 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 has been produced.

Depositary 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 in 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.

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 Central Government thereunder from time to time.

The 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.

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 -

• 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,
• Deposits with branch outside India of an authorised dealer in India, and
• Treasury bills and other monetary instruments with a maturity or unexpired maturity of the instrument of one year or less.

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 upto which an Indian company can raise ADRs / GDRs.

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. RBI regulations regarding voting rights in the case of banking companies will continue to be applicable to all shareholders exercising voting rights.

Erstwhile OCBs who are not eligible to invest in India through the portfolio route 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.

The pricing of ADR / GDR issues should be made at a price not less than the higher of the following two averages: 

(i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date;

(ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

The "relevant date" means the date thirty days prior to the date on which the meeting of the general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to consider the proposed issue.

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.

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.

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 ADR / GDR.

The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full details of such issue in the form enclosed in Annex-8, 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-9, to Reserve Bank within 15 days of the close of the calendar quarter.

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).

The FIIs who have been granted registration by SEBI should approach their designated Authorised Dealer bank (known as Custodian Bank), for opening a foreign currency account and/or a Non Resident Special Rupee Account.

NRIs can approach the designated branch of any AD bank authorised by RBI to administer the Portfolio Investment Scheme for permission to open a NRE/NRO account under the Scheme for routing investments.

Prohibition on investments

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

Total holding of each FII/sub account under this Scheme 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 the Indian company.

Total holdings of all FIIs/sub-accounts 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 of its Board of Directors followed by a special resolution to that effect by its General Body.

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% of the total paid-up equity capital or 5% 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.

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

v) Trading in Transferable Development Rights (TDRs).

SEBI registered FIIs are allowed to trade in all exchange traded derivative contracts on recognised Stock Exchanges in India subject to the position limits as prescribed by SEBI 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 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 Authorised Dealer banks have to keep proper records of the above mentioned separate account and submit them to Reserve Bank as and when required.

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 subject to SEBI guidelines. In order to accept the securities as collateral, recognised Stock Exchanges have to take RBI approval under FEMA.

AD banks can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments. Rebooking of cancelled forward contracts is allowed up to a limit of 2% of the market value of the entire investment of FIIs in equity and / or debt in India. The limit for calculating the eligibility for rebooking will be based upon market value of the portfolio as at the beginning of the financial year (April – March). The outstanding contracts have to be duly supported by underlying exposure at all times. The AD Category - I bank has to ensure that (i) total forward contracts outstanding does not exceed the market value of portfolio and, (ii) forward contracts permitted to be rebooked does not exceed 2% of the market value as determined at the beginning of the financial year. The monitoring of forward cover is to be done on a fortnightly basis.

SEBI registered FIIs / sub-accounts are allowed to keep with the Trading Member / Clearing Member amount sufficient to cover the margins prescribed by the Exchange / Clearing House and such amounts as may be considered necessary to meet the immediate needs.

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

(i) 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

(ii) 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 PCDs / FCDs/ Right Renunciations / Warrants / Units of Domestic Mutual Fund Schemes.

The SEBI registered FII shall restrict allocation of its total investment between equities and debt in the Indian capital market in the ratio of 70:30. The FII may form a 100% debt fund and get such fund registered with SEBI. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard.

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 banks have to 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 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 Authorised Dealer bank in India) should report these figures separately under item no. 5 of Form FC-GPR (Post issue pattern of shareholding) so that the details could be suitably reconciled for statistical / monitoring purposes.

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

The NRI investor has to take delivery of the shares purchased and give delivery of shares sold.

Payment for purchase of shares and/or 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 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.

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

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 to a person resident in India or outside India without prior approval of RBI.

When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit, which is 2% below the applicable limit, Reserve Bank will issue a notice to all designated branches of Authorised Dealer banks stating that any further purchases of shares of the particular Indian company will require prior approval of Reserve Bank. RBI gives case-by-case approvals to FIIs for purchase of shares of companies included in the Caution List. This is done on first-come-first-served basis.

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

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.

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, RBI permits the FVCI to open a foreign currency account or rupee account with a designated branch of an AD bank.

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

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 inward remittance through normal banking channels from abroad or out of funds held in NRE / FCNR / NRO account maintained with the AD bank. 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.

A Non-resident Indian 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.

Foreign Institutional Investors can buy 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. These purchases are subject to limits notified by SEBI.

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, subject to the following conditions.

a) Investment by all FIIs in 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 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 the issue.

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

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

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 notified by the Department of Banking Operations and Development (DBOD), Reserve Bank of India, from time to time.

The issue-wise details of 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 Bank.

Investment by FIIs in Upper Tier II Instruments raised in Indian Rupees will be outside 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.

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 of India through the soft copy of the LEC Returns.

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 land/plantation property / farm house. He can transfer any immovable property other than agricultural or plantation property or farm house to:

a) A person resident outside India who is a citizen of India or

b) A person of Indian origin resident outside India or

c) A person resident in India.

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

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 of India from time to time.

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

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

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

a) By way of sale to a person resident in India.

b) By way of gift to a person resident in India or a Non resident Indian or a PIO.

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 banking channel.

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 / concerned person is required 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 AD bank 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;

i) 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;

ii) 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.

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

Companies incorporated outside India, desirous of opening a Liaison/Branch Office in India have to make an application in form FNC-1 to the Reserve Bank of India, 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.

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 RBI under whose jurisdiction the office is set up. A Liaison Office can undertake the following activities in India:

ii) Representing in India the parent company/group companies.

ii) Promoting export import from/to India.

iv) Acting as a communication channel between the parent company and Indian companies.

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 undertaking the following activities in India:

(i) Export/Import of goods*

(ii) Rendering professional or consultancy services.

(iii) Carrying out research work, 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.

Foreign airline/shipping Company.

RBI 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:

i) such units are functioning in those sectors where 100 per cent FDI is permitted,

ii) such units comply with part XI of the Companies Act (Section 592 to 602),

iii) such units function on a stand-alone basis,

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

(a) the project is funded directly by inward remittance from abroad; or

(b) the project is funded by a bilateral or multilateral International Financing Agency; or

(c) the project has been cleared by an appropriate authority; or

(d) 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 RBI to obtain approval.

ADs can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:

a) 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,

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

c) Each Project has only one Foreign Currency Account.

d) The permissible debits to the account shall bepayment 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.

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

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

AD branch can permit intermittent remittances by Project Offices pending winding up / completion of the project provided they are satisfied with the bonafides of the transaction and 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.

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.

Partnership/Proprietary concerns set up abroad are not allowed to establish Branch/Liaison Offices in RBI.

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

At the time of winding up of the Liaison Offices, the company has to approach the respective Regional Office with documents such as:

• Copy of the Reserve Bank’s permission for establishing the Office in India;
• Auditor’s certificate,—

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

• No-objection or Tax clearance certificate from Income-tax authority for the remittance; and
• Confirmation from the applicant that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.

Once RO's approval is obtained, ADs can allow remittance of surplus.

A non-resident Indian or a person of Indian origin 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 / NRO account maintained with AD bank.

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.