NRI Legal Section

Lealte provides wide range of legal support to NRI/ PIO, including Estate & Inheritance, Property Dispute, Investment in Indian Entity/ Company, Joint Ventures in India, RBI/ FEMA/ SEBI / RoC Assistance, Adoption, Trust /company/firm/society formation etc.

Investment by Non- Resident Indian /Person of Indian Origin

Legal Framework: Foreign Direct Investment by non-resident in resident entities through transfer or issue of security to person resident outside India is a ‘Capital account transaction’ and is regulated under FEMA, 1999 and its regulations. Keeping in view the current requirements, the Government from time to time comes up with new regulations and amendments/changes in the existing ones through order/allied rules, Press Notes, etc.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendment to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No.FEMA 20/2000-RB dated May 3, 2000). These notifications take effect from the date of issue of Press Notes/ Press Releases, unless specified otherwise therein. The procedural instructions are issued by the Reserve Bank of India vide A.P.Dir. (series) Circulars. The regulatory framework over a period of time thus consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc..

The Circular 1 of 2010 and Circular 2 of 2010 issued by the DIPP on 31st March 2010 and 30th September 2010 respectively, consolidated into one document all the prior policies/regulations on FDI which are contained in FEMA, 1999, RBI Regulations under FEMA, 1999 and Press Notes/Press Releases/Clarifications issued by DIPP and reflected the current policy framework on FDI. The present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on March 31, 2011, and reflects the FDI Policy as on April 1, 2011. This Circular accordingly will take effect from April 1, 2011. Its next revision will be published on 30.09.2011.

While this circular consolidates FDI Policy Framework, the legal edifice is built on notifications issued by RBI under FEMA. Therefore, any changes notified by RBI from time to time would have to be complied with and where there is a need / scope of interpretation, the relevant FEMA notification will prevail.

Regulations :

Some Definitions for Exchange Control Laws :

‘Capital’ means equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures. ‘Investment on repatriable basis’ means investment, the sale proceeds of which, net of taxes, are eligible to be repatriated out of India and the expression ‘investment on non-repatriable basis’ shall be construed accordingly.

‘Non resident entity’ means a ‘person resident outside India’ as defined under FEMA

‘Non Resident Indian’ (NRI) means an individual resident outside India who is a citizen of India or is a person of Indian origin.

‘Person’ includes :-

an individual
a Hindu undivided family,
a company
a firm
an association of persons or a body of individuals whether incorporated or not,
every artificial juridical person, not falling within any of the preceding subclauses, and
any agency, office, or branch owned or controlled by such person.

‘Person of Indian Origin’ (PIO) means a citizen of any country other than Bangladesh or Pakistan, if

‘Person resident in India’ means -

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

Person resident outside India’ means a person who is not a Person resident in India.

‘Resident Entity’ means ‘Person resident in India’ excluding an individual.

Regulatory Provisions :

Non Resident Indians/Person of Indian Origins enjoy all the legal benefits of investment in India which are enjoyed by a Non Resident but certain other benefits have been conferred on them by the Government of India.

FDI in Partnership Firm / Proprietary Concern:

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided;
Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / Authorized banks.
The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.
Amount invested shall not be eligible for repatriation outside India.
Investments with repatriation benefits: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation benefits. The application will be decided in consultation with the Government of India.

FDI in Venture Capital Fund (VCF):

FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies, as per applicable regulations. If a domestic VCF is set up as a trust, a person resident outside India (non-resident entity/individual including an NRI) cannot invest in such domestic VCF under the automatic route of the FDI scheme and would be allowed subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated company under the Companies Act, 1956, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc.

Transfer of shares and convertible debentures –

Subject to FDI sectoral policy, non-resident investors can also invest in Indian companies by purchasing/acquiring existing shares from Indian shareholders or from other nonresident 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 erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs).
NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI.
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 stock broker registered with stock exchange or a merchant banker registered with SEBI.
A person resident in India can transfer by way of sale, shares/convertible debentures (including transfer of subscriber’s shares), of an Indian company in sectors other than financial services sectors (i.e. Banks, NBFC, Insurance, Asset Reconstruction Companies (ARCs), Credit Information Companies (CICs), infrastructure companies in the securities market viz. Stock Exchanges, Clearing Corporations, and Depositories, Commodity Exchanges, etc.) under private arrangement to a person resident outside India, subject to the prescribed guidelines.
General permission is also available for transfer of shares/convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to the prescribed guidelines.
The above General Permission also covers transfer by a resident to a non-resident of shares/convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route, as well as transfer of shares by a non-resident to an Indian company under buyback and/or capital reduction scheme of the company. However, this General Permission is not available in case of transfer of shares / debentures, from a Resident to a Non- Resident/Non-Resident Indian, of an entity engaged in any activity in the financial services sector (i.e. Banks, NBFCs, Asset Reconstruction Companies (ARCs), Credit Information Companies (CICs), Insurance, infrastructure companies in the securities market such as Stock Exchanges, Clearing Corporations, and Depositories, Commodity Exchanges, etc.).
The Form FC-TRS should be submitted to the AD Category-I Bank, within 60 days from the date of receipt of the amount of consideration. The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor/transferee, resident in India. (k) A Non-Resident Indian (NRI) may invest in exchange traded derivative contracts approved by SEBI from time to time out of INR funds held in India on non-repatriable basis subject to the limits prescribed by SEBI. Such investments will not be eligible for repatriation benefits.

Investment in Aviation:

100% foreign investment is allowed in the Air Transport Services (Domestic Airlines) for NRIs.

Investment in Real Estate /Housing :

Only NRIs are allowed to invest upto 100 % in the areas listed below :

Development of serviced plots and construction of built-up residential premises
Investment in real estate covering construction of residential and commercial premises including business centres and offices.
Development of townships
City and regional level urban infrastructure facilities, including both roads and bridges
Investment in manufacture of building materials
Investment in participatory ventures in (a) to (e) above
Investment in Housing finance institutions which is also opened to FDI as an NBFC

Investment in Listed Indian Companies at par with Resident Indians :-

No person other than registered FII/NRI as per Schedules II and III of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations of FEMA 1999, can invest/trade in capital of Indian Companies in the Indian Stock Exchanges directly i.e. through brokers like a Person Resident in India.

Restrictions:

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

Investment in Immovable Property in India

Acquisition of immovable property in India by persons resident outside India (foreign national) is regulated in terms of section 6 (3) (i) of the Foreign Exchange Management Act (FEMA), 1999 as well as by the regulations contained in the Notification No. FEMA 21/2000-RB dated May 3, 2000, as amended from time to time. Section 2 (v) and Section 2 (w) of FEMA, 1999 defines `person resident in India’ and a `person resident outside India’, respectively. Person resident outside India is categorized as Non- Resident Indian (NRI) or a foreign national of Indian Origin (PIO) or a foreign national of non-Indian origin. The Reserve Bank does not determine the residential status. Under FEMA, residential status is determined by operation of law. The onus is on an individual to prove his / her residential status, if questioned by any authority.

In terms of the provisions of Section 6(5) of FEMA 1999, a person resident outside India can hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was a resident in India or inherited from a person who was a resident in India.

The regulations under Notification No. FEMA 21/2000-RB dated May 3, 2000, as amended from time to time, permit a NRI or a PIO to acquire immovable property in India, other than agricultural land or, plantation property or farm house. Further, foreign companies who have been permitted to open a Branch or Project Office in India are also allowed to acquire any immovable property in India, which is necessary for or incidental to carrying on such activity. Such dispensation is however not available to entities which are permitted to open liaison offices in India.
The restrictions on acquiring immovable property in India by a person resident outside India would not apply where the immovable property is proposed to be acquired by way of a lease for a period not exceeding 5 years or where a person is deemed to be resident in India.
In order to be deemed to be a person resident in India, from FEMA angle, the person would need to comply with the provisions of Section 2(v) of FEMA 1999. The Press Release dated February 1, 2009 issued by Government of India in this regard is enclosed as Annex.

Note: Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan cannot acquire or transfer immovable property in India, (other than on lease not exceeding five years) without the prior permission of the Reserve Bank.

5. NRIs/ PIOs are allowed to repatriate an amount up to USD one million, per financial year (April-March), out of the balances held in the Non-Resident (Ordinary) Rupee (NRO) account, subject to compliance with applicable tax requirements. This amount includes sale proceeds of assets acquired by way of inheritance or settlement

Regulations

Regulatory Provisions :

Acquisition and Transfer of Property in India by an Indian Citizen resident outside India:-
A person resident outside India who is a citizen of India may –

acquire any immovable property in India other than agricultural/plantation/farm house, and
transfer any immovable property in India to a person resident in India.
transfer any immovable property other than agricultural or plantation property or farm house to
person resident outside India who is a citizen of India or to a person of Indian origin resident outside India.

Acquisition and Transfer of Property in India by a Person of Indian origin :-

A person of Indian origin resident outside India may –

acquire any immovable property other than agricultural land/farm house/ plantation property in India by purchase, from out of (i) funds received in India 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 Act and the regulations made by the Reserve Bank under the Act;
acquire any immovable property in India other than agricultural land / farm house / plantation property by way of gift from a person resident in India or from a person resident outside India who is a citizen of India or from a person of Indian origin resident outside India;
acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations or from a person resident in India;
transfer any immovable property in India other than agricultural land/farm house/plantation property, by way of sale to a person resident in India;
transfer agricultural land/farm house/ plantation property in India, by way of gift or sale to a person resident in India who is a citizen of India;
transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India who is a citizen of India or to a person of Indian Origin resident outside India.

Repatriation of sale proceeds:-

A person resident outside India, who has acquired a property when he was a resident of India or inherited from a person resident India, , or his successor shall not, except with the prior permission of the Reserve Bank, repatriate outside India the sale proceeds of any immovable property referred to in that sub-section;

Refund of purchase consideration

Refund of application / earnest money / purchase consideration made by the house building agencies / seller on account of non-allotment of flat / plot / cancellation of bookings / deals for purchase of residential / commercial property, together with interest, if any (net of income tax payable thereon) may be allowed by the Authorised Dealers by way of credit to NRE/FCNR (B) account, provided the original payment was made out of NRE / FCNR (B) account of the account holder or remittance from outside India through normal banking channels and the Authorised Dealer is satisfied about the bonafides of the transaction.

Immovable property acquired by way of inheritance/ legacy/ out of Rupee funds

A Non-Resident Indian (NRI) / Person of Indian Origin (PIO) may remit an amount, not exceeding US $ 1,000,000 (US Dollar One million only) per financial year out of the balances held in NRO accounts / sale proceeds of assets by way of purchase / the assets in India acquired by him by way of inheritance / legacy/ out of Rupee funds. This is subject to production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, and a tax clearance / no objection certificate from the Income Tax Authority for the remittance. Remittances exceeding US $ 1,000,000 (US Dollar One million only) in any financial year requires prior permission of the Reserve Bank.

In cases of deed of settlement made by either of his parents or a close relative (as defined in Section 6 of the Companies Act, 1956) and the settlement taking effect on the death of the settler, the original deed of settlement and a tax clearance / No objection certificate from the Income-Tax Authority should be produced for the remittance. Where the remittance as above is made in more than one installment, the remittance of all such installments shall be made through the same Authorised Dealer.

Rental Income

Letting out of Immovable Property :The RBI has granted general permission to NRI’s and foreign citizens of Indian origin, to let out their residential properties acquired for their bona fide residential purpose but which on account of their residence abroad, are not required for their immediate residential purpose. However, there are restrictions regarding the repatriation of the rental income earned from such letting out of the property. The rental income is on a non-repatriation basis. Thus funds (rental income) must be credited to the NRO Account/ Resident Accounts in India.