India’s cabinet on 21 May approved amendments to the foreign direct investment (FDI) policy to: (i) expand the definition of “non-resident Indians” (NRIs) to include Overseas Citizen of India cardholders (OCIs) and Person of Indian Origin cardholders (PIOs); and (ii) treat all investments by NRIs under schedule 4 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (TISPRO), i.e. investments made on a non-repatriable basis, as domestic investments, at par with investments by residents.
The amendments were notified through Press Note 7 of 2015 and became effective from 18 June.
The FDI policy, and the rules and regulations framed under the Foreign Exchange Management Act, 1999 (FEMA), defined NRI as an individual resident outside India who is a citizen of India or a person of Indian origin. The definition as contained in the FDI policy has now been amended to: “an individual resident outside India who is a citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of Section 7(A) of the Citizenship Act, 1955. ‘Persons of Indian Origin’ cardholders registered as such … are deemed to be ‘Overseas Citizen of India’ cardholders”.
This is a follow-up to amendments to the Citizenship Act earlier this year that provided that PIOs will now be considered OCIs, and seeks to align FDI policy with the government’s policy to provide PIOs and OCIs parity of treatment with NRIs in economic, financial and educational matters.
Under the current FDI policy, investment by NRIs under schedule 1 (i.e. as per FDI policy) and schedule 3 (i.e. as per the portfolio investment scheme) of TISPRO is counted as FDI in an Indian company. However, in certain sectors, such as construction development and segments of the civil aviation sector, NRIs get preferential treatment over other non-resident investors. This amendment has widened the group of persons eligible to invest in India as per FDI policy under the NRI category.
TISPRO permits NRIs to invest in: listed and unlisted securities under the FDI scheme (schedule 1); listed securities on the stock exchange under the portfolio investment scheme, on a repatriable and non-repatriable basis (schedule 3); and listed and unlisted securities, on a non-repatriation basis (schedule 4).
Schedule 4 permits NRIs to purchase shares, convertible debentures and warrants of an Indian company issued by way of public issue, private placement or rights issue, with the exception of Indian companies engaged in specified businesses. It specifies the types of non-resident accounts from which investments under schedule 4 can be made as well as the type of non-resident accounts into which the sale and maturity proceeds can be credited. The investment proceeds can only be credited to the non-resident ordinary rupee (NRO) account of the investor.
The most important feature of schedule 4 is that investments are made on a non-repatriable basis and the capital and appreciation on it is non-repatriable, except for US$1 million repatriable annually from a NRO account.
At present the FDI policy (but not TISPRO) has been amended to provide that all investments by NRIs under schedule 4 will be considered domestic investment at par with investments made by residents. Accordingly, non-repatriable investments of NRIs are outside the purview of the restrictions imposed on FDI investments and therefore free of pricing guidelines and sectoral caps.
Earlier, there was an ambiguity in the treatment of NRI investments under schedule 4 when compared to NRI investments under schedules 1 and 3 which as per the FDI policy were considered “foreign investment”. Now, with the amendment clarifying the position with respect to investment by NRIs under schedule 4 (i.e. on a non-repatriable basis), innovative investment structures can be employed by NRIs to increase their investments in India.
This amendment is in line with the suggestions made by the Arvind Mayaram Committee in June 2014 that non-repatriable investment of the Indian diaspora should be treated as domestic and exempt from FDI-related conditions.
The form of the amendments to TISPRO will determine the real impact of the change in treatment of NRI investments. When NRIs weigh domestic treatment against the cost of non-repatriability of their investments, will they find an incentive to invest more in India?
While at present the relaxation is strictly in respect of non-repatriable schedule 4 investments by NRIs, it will be interesting to see whether the government will extend such relaxations to NRI investment under schedule 1, i.e. the FDI scheme, or other schedules to TISPRO as well, thereby allowing PIOs and OCIs to invest in India under the portfolio investment scheme, or even to all FEMA rules and regulations, so as to bring about real parity among NRIs, PIOs and OCIs.
Luthra & Luthra Law Ofﬁces is a full-service law ﬁrm with ofﬁces in Delhi, Mumbai, Bangalore and Hyderabad. Shinoj Koshy is a partner and and Neha Sinha is a senior associate at the ﬁrm. This article is intended for general informational purposes only and is not a substitute for legal advice.
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