Non Resident Indian and shares of Indian Companies

Vector Flat Line Art Modern Money And Finance Icons Set

QUERY I: Can an NRI purchase shares of an Indian Company? If yes, can the NRI sell such shares to a foreign company?

  •  Portfolio Investment Scheme

NRIs can purchase shares or convertible debenture of an Indian Company through stock exchanges, under the portfolio investment scheme [PINS][1] on repatriation and /or non repatriation basis.[2]

  • Demat Accounts under PINS

If you want to buy shares as an NRI, you would need to open a demat account under the Portfolio Investment Scheme (PINS). In this demat, you can buy shares with funds in your NRE account and sale proceeds can be credited to NRE account for repatriation. If you choose to buy the shares on non-repatriable basis, then, the proceeds will be credited to the NRO account. You must maintain two separate demat accounts for repatriable and non-repatriable shares. Recently, the RBI also specified that an NRE must have a separate account linked to the PINS demat account. It cannot be the NRO or NRE account through which other routine transactions are conducted. Once you become a resident again, you must close the PINS account.[3]

How to do this: Your demat service provider will be able to help you with all of the above. You would need to submit documents such as passport and visa to do the same.[4]

  • Investment in Preference Shares

Foreign investment through preference shares is treated as foreign direct investment. However, the preference shares should be fully and mandatorily convertible into equity shares within a specified time to be reckoned as part of share capital under FDI. Investment in other forms of preference shares requires to comply with the ECB norms.[5]

  • Transfer of shares to a foreign company

The Reserve Bank may, on an application made to it and for sufficient reasons, permit a person resident outside India to issue or transfer any security, subject to such conditions as may be considered necessary.[6][7]

  1. Transfer of shares to a person

A person resident outside India may purchase shares or convertible debentures of an Indian company under Foreign Direct Investment Scheme, subject to the terms and conditions specified in Schedule 1.

  1. Transfer of shares to an overseas corporate body

A non-resident Indian or an overseas corporate body may purchase shares or convertible debentures of an Indian company:[8]

  1. on a stock exchange under the Portfolio Investment Scheme, subject to the terms and conditions specified inSchedule 3
  2. on non-repatriation basis other than under Portfolio Investment Scheme, subject to the terms and conditions specified inSchedule 4.

The RBI Master Circular on Foreign Investment in India updated as on June 18, 2014 [RBI/2013-14/15 Master Circular No.15/2013-14] provides:[9]

8 B.I Transfer of shares by a Person resident outside India

  1. NRI to NRI (Sale / Gift):NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI.

OPINION: From a bare perusal of the above stated provisions of the FEMA regulations, read with the master circular on Foreign Direct Investment, it is evident that there is no bar under Indian laws on the transfer of shares of an Indian company by a non- resident to a non- resident . A general permission has been granted by the RBI for the said transaction. Hence there is no need to inform the RBI prior to such transaction, however subject to the applicable FDI cap.

Although no reporting requirements have been laid down by the RBI pursuant to the transfer of shares of an Indian company by a non resident to a non resident, however, the transferee, in order to effectuate the transfer by getting its name recorded as a member in the shareholder’s register of the target company, has to apply to the target company along with the share transfer deed.

QUERY II: Whether an NRI can sell his shares bought from an Indian Company, which has failed to file the declarations with RBI within 30 days from receipt of sale consideration and issuance of shares (Schedule 1)?

  • Mandate to report issue of shares

After issue of shares (including bonus and shares issued on rights basis and shares issued on conversion of stock option under ESOP scheme)/ convertible debentures / convertible preference shares, the Indian company has to file Form FC-GPR, through its AD Category I bank, not later than 30 days[10] from the date of issue of shares. The Form can also be downloaded from the Reserve Bank’s website.[11] Non-compliance with the above provision would be reckoned as a contravention under FEMA and could attract penal provisions.[12]

OPINION: The Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 [Notification No. FEMA 20 /2000-RB dated 3rd May 2000] under section 9(1)(B) and the RBI Master Circular on Foreign Investment in India dated July 01 2013 [RBI/2013-14/15 Master Circular No.15/2013-14] (Updated as on June 18, 2014)[13] Section V(1)(iv) mandate Indian companies to report the issue of shares to the RBI within 30 days of the issue (to an NRI), the failure of which could attract penal provisions.

Although the repercussions of the failure to report such an issue of shares has not been specified, the same would befall the company and not the shareholder.

However, before the sale of such shares, the principle of due diligence would require that the shareholder report to the company the lapse so made and ensure the submission to the Reserve Bank in form FC-GPR.

QUERY III: Can an NRI purchase shares of an Indian Company from the funds lying in his NRO account? If, yes, whether such purchase of shares would attract the provisions of FDI vis-à-vis filing of declarations with RBI within 30 days from receipt of sale consideration and issuance of shares (Schedule 1)?

  • Purchase of shares of an Indian Company by an NRI from the funds lying in his NRO account

Under Portfolio Investment Scheme[14]:

As under the Master Circular on Foreign Investment in India [RBI/2012-13/15 Master Circular No.15/2012-13] (Updated as on April 01, 2013)

  1. NRIscan approach the designated branch of any AD Category – I bank (which has been authorised by the Reserve Bank to administer the PIS) for permission to open a single designated account (NRE/NRO account) under the PIS for routing investments.
  2. Payment for purchase of shares and/or debentures on repatriation basishas 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.
  • Purchase of shares to attract the provisions of FDI vis-à-vis filing of declarations with RBI within 30 days from receipt of sale consideration and issuance of shares (Schedule 1)

The RBI Master Circular on Foreign Investment in India dated July 01 2013, [RBI/2013-14/15 Master Circular No.15/2013-14] (Updated as on June 18, 2014) under Section V(7)[15] provides for:

  1. Reporting of NRI investments under Portfolio Investment Scheme (PIS)

The designated link office of the AD Category – I bank shall furnish to the Reserve Bank, a report on a daily basis on PIS transactions undertaken on behalf of NRIs for their entire bank. This report can be uploaded directly on the ORFS web site (https://secweb.rbi.org.in/ORFSMainWeb/Login.jsp). It would be the banks responsibility to ensure that the data submitted to RBI is reconciled by periodically taking a NRI holding report for their bank.

  1. Reporting of NRI investments under FDI via NRO account

Investments made by NRIs via FDI acquire general permission under Regulation 5(1) of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 which provides for a mandatory report to be filed by the Indian Company under Schedule I not later than 30 days from the date of receipt of the amount of consideration in form FC-GPR together with

  1. a certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that

– all the requirements of the Companies Act, 1956 have been complied with

– terms and conditions of the Government approval, if any, have been complied with

– the company is eligible to issue shares under these Regulations

– the company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration

  1. 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.

OPINION: Shares of a company can be purchased from the funds lying in an NRO (Ordinary non-resident) account

  • As a Portfolio Investment as per RBI Master Circular on Foreign Investment in India dated July 01 2013, [RBI/2013-14/15 Master Circular No.15/2013-14] (Updated as on June 18, 2014) under Section V(7)
  • As an FDI under Regulation 5(1) of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 which provides for a mandatory report to be filed by the Indian Company under Schedule I not later than 30 days from the date of receipt of the amount of consideration in form FC-GPR. Thus obligating the company whose shares are purchased thereon and not the holder of the NRO account.

 

 

[1] Portfolio Investment Scheme (PIS) is a scheme of reserve bank of India under which – Non Resident Indian (NRIs) can purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a bank, which deals in Portfolio Investment. All sale/purchase transactions are to be routed through the designated branch.

[2] http://www.nseindia.com/content/members/faq_NRI_TA.pdf

[3] http://articles.economictimes.indiatimes.com/2011-05-13/news/29536714_1_account-interest-property-or-investments

[4] http://articles.economictimes.indiatimes.com/2011-05-13/news/29536714_1_account-interest-property-or-investments

[5] https://www.rbi.org.in/scripts/FAQView.aspx?Id=26

[6] Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA.20/2000-RB dated May 3, 2000)

[7] Provided that the person to whom the shares are being transferred 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 debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company whose shares are being transferred is engaged (https://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174)

[8] Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 [Notification No. FEMA 20 /2000-RB dated 3rd May 2000] as after 17th amendment dated 15th December 2014

[9] https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=8104#8

[10]https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174

[11] http://www.rbi.org.in/Scripts/BS_ViewFemaForms.aspx

[12] https://www.rbi.org.in/scripts/FAQView.aspx?Id=26

[13] https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8104

[14] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7355&Mode=0

[15] https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8104

 

Author: Manveen Malhi, Student of law at Army Institute of Law, Mohali

Intern, Kaden Boriss Partners, Lawyers

Gurgaon, India

Facebooktwittergoogle_plusredditpinterestlinkedinmail