Investment in shares of an Indian Pvt.

Limited Company/unlisted Company by a

Non Resident Indian

India is one of the fastest growing economy in the world today attracting a lot of foreign
capital investment. There are many Non Resident Indians who are looking for strategic
long term investments in good projects apart from portfolio investment in listed
companies. The article presents the regulations under Foreign Exchange Management
Act, 1999 for investment in shares of an Indian Pvt. Limited Company or an unlisted
company by a Non Resident Indian. Foreign Exchange Management (Transfer or issue of
security by a person resident outside India) Regulations, 2000 deals with provisions
related to investment in shares of an Indian Pvt. Limited Company or an unlisted
company by a Non Resident Indian.

There are two alternative routes for a NRI’s to invest in shares of an Indian Pvt. Limited
Company or unlisted company. One is on a repatriation basis according to Schedule 1 of
Foreign Exchange Management (Transfer or issue of security by a person resident outside
India) Regulations, 2000. The other alternative is to invest in accordance with Schedule 4
of the above regulation on a non repatriation basis.
A) Investment on a repatriation basis according to schedule 1.
Schedule 1 specifies that if the person purchasing the shares under this scheme proposes
to be collaborator or proposes to acquire the entire shareholding of a new Indian
company, he should obtain prior permission of Central Government if he has a 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 issuing the shares is engaged.
Foreign direct investment scheme
Subject to above, Schedule 1 specifies automatic route of direct investment, which
neither requires RBI approval nor Central Government approval, available for a NRI to
invest in shares of a Pvt. Ltd. Company or an unlisted company provided that Indian
Company is not engaged in any activity, or in manufacturing of item included in
Annexure ‘A’. The investment can be made to the extent of sectoral cap specified in
Annexure ‘B’, subject to compliance with the provisions of Industrial Policy and
Procedures as notified by SIA in the Ministry of commerce and industry, Govt. of India,
from time to time :
Provided that
(i) the activity of the issuer company does not require an industrial licence 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 of 1991 as amended from time to time;
(ii) the shares are not being issued with a view to acquire existing shares of an
Indian company.
Explanation to the above states that a company which proposes to embark on expansion
programme to undertake activities or manufacture items included in Annexure B to this
schedule may issue shares out of fresh capital proposed to be issued by it for the purpose
of financing expansion programme, upto the extent indicated in Annexure B.
The interpretation of this explanation virtually means that fresh shares can be issued only
to undertake expansion programme. If there is no expansion programme expected to be
undertaken than investment can be made by purchasing existing shares of the Indian
company.
Issue of shares by a trading company
A trading company incorporated in India may issue shares to the extent of 51% of its
capital, to a Non Resident Indian subject to the condition that remittance of dividend to
the shareholders outside India is made only after the company has secured registration as
an Export/Trading/Star Trading/Super Trading House from the Directorate General of
Foreign Trade, Ministry of Commerce, Government of India, New Delhi.
Issue of shares by a Small scale industrial unit
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, may issue shares only to the extent of
24% of its paid-up capital;
Provided that such a company may issue shares in excess of 24% of its paid up capital if
it has given up its small scale status;
it is not engaged or does not propose to engage in manufacture of items reserved for
small scale sector, and
it complies with the ceilings specified in Annexure B.
However 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 referred to in
paragraph 1 in excess of 24 per cent provided it complies with the ceilings specified in
Annexure B.
Issue price
Price of shares issued by a Pvt. Ltd. Company or an unlisted company shall not be less
than fair valuation of shares done by a chartered accountant as per guidelines issued by
the erstwhile Comptroller of Capital issues.
Mode of payment for shares issued to person resident outside India.
A company in India issuing shares under schedule 1 shall receive the amount of
consideration of such shares-
(i) by inward remittance through normal banking channels, or
(ii) by debit to NRE/FCNR account of the person concerned maintained with an
authorised dealer/authorised bank.
Report by the Indian company
Even though foreign direct investment scheme does not require any approval from RBI or
Central government but Indian company is required to submit following reports to RBI:-
a) within 30 days from the date of receipt of consideration, a report indicating ;-
 i) Name and address of the foreign investors
ii) Date of receipt of fund and their rupee equivalent
iii) Name and address of the authorised dealer through whom the funds
have been received, and
iv) Details of Government approval, if any
b) within 30 days from the date of issue of shares, a report in Form FC-GPR together
with,
i) a certificate from the Company Secretary of the Indian Company
certifying that
1) all the requirements of Companies Act, 1956 has been complied
with;
2) terms and conditions of government approval, if any, has been
complied with;
3) the company is eligible to issue shares under these Regulations;
and
4) the company has all original certificates issued by authorised
dealers in India evidencing receipt of amount of consideration.
ii) a certificate from the Statutory Auditors or Chartered Accountant
indicating the manner of arriving at the price of the shares issued to the
Non Resident Indian.
Dividend Balancing

Where a company is engaged in any of the industries in the consumer goods sector, specified
in Annexure E, or in any other activity where the condition of dividend balancing has been
stipulated in terms of the provisions of Industrial Policy and Procedures notified by
Secretariat for Industrial Assistance, the cumulative outflow of foreign exchange on account
of payment of dividend over a period of seven years from the date of commencement of
commercial production to investors outside India shall not exceed cumulative amount of
export earning of the company during those years.

Provided that

the restriction under this paragraph shall not apply

a) to a company that has completed a period of seven years from the date of
commencement of commercial production,

b) in case of an existing company that has issued fresh equity to persons

resident outside India under these Regulations, the restriction shall apply to
the fresh shares from the date of their issue.
Rate of Dividend on Preference Shares

The rate of dividend on preference shares or convertible preference shares issued under
these Regulations shall not exceed 300 basis points over the Prime Lending Rate of State
Bank of India prevailing as on the date of the Board meeting of the company in which issue
of such shares is recommended.

Transfer of shares of an Indian Company by a NRI

Even though foreign exchange on sale of investment under above scheme can be
repatriated out of India, following restrictions apply on sale of such shares:-
Regulation 9(2)(ii) of Foreign Exchange Management (Transfer or issue of security by a
person resident outside India) Regulations, 2000, states that a non-resident Indian may
transfer by way of sale to another non-resident Indian only. However transfer by way of
sale by non-resident Indian to a person resident in India shall require prior permission of
RBI for which application in Form TS 1 may be made to the Reserve Bank of India.
While considering the grant of permission, the Reserve Bank shall take into account the
following factors:-

i) if the consideration payable for the transfer does not exceed Rs.20 lakh per seller
per company, at a price mutually agreed to between the seller and the buyer, based
on any valuation methodology currently in vogue, on submission of a certificate
from the statutory auditors of the Indian company whose shares are proposed to be
transferred, regarding the valuation of the shares, and

ii) if the amount of consideration payable for the transfer exceeds Rs.20 lakh per seller
per company at a price which is lower of the two independent valuations of share,
one by statutory auditors of the company and the other by a Chartered Accountant
or by a Merchant Banker in Category 1 registered with Securities and Exchange
Board of India.

Remittance of sale Proceeds under this scheme

An authorised dealer may allow the remittance of sale proceeds of a security (net of
applicable taxes) to the seller of shares resident outside India:-
Provided -
a) the security was held by the seller on repatriation basis;

b) Reserve Bank's approval has been obtained for sale of the security and remittance of the
sale proceeds thereof; and

c) A no objection/tax clearance certificate from the Income Tax authority has been produced.

Issue of shares by a company requiring the Government approval

A company which is engaged or proposes to engage in any activity specified in
Annexure 'A' or which proposes to issue shares to a Non Resident Indian beyond the sectoral
limits stipulated in Annexure 'B' or which is otherwise not eligible to issue shares to a person
resident outside India, may issue shares to a Non Resident Indian, provided it has secured
prior approval of Secretariat for Industrial Assistance or, as the case may be of the Foreign
Investment Promotion Board of the Government of India and the terms and conditions of
such an approval are complied with.

B) Investment on non-repatriation basis according to Schedule 4.

Regulation 5(3)(ii) of the Foreign Exchange Management (Transfer or issue of security
by a person resident outside India) Regulations, 2000, states that a non-resident Indian
may purchase shares of an Indian company on non-repatriation basis subject to the terms
and conditions specified in Schedule 4.
Schedule 4 states that a Non-resident Indian may, without any limit, purchase on non-
repatriation basis, shares or convertible debentures of an Indian company issued whether
by public issue or private placement or right issue, however no purchase of shares of an
Indian company shall be made under this scheme if the company concerned is a chit fund
or a nidhi company or is engaged in agricultural /plantation activities or real estate
business or construction of farm houses or dealing in Transfer of Development Rights.
Paragraph 3 of above schedule states that the amount of consideration for purchase of shares
of an Indian company on non-repatriation basis, shall be paid by way of inward remittance
through normal banking channels from abroad or out of funds held in NRE/FCNR
/NRO/NRSR/NRNR account maintained with an authorised dealer or as the case may be
with an authorised bank in India.

Provided that in the case of an NRI resident in Nepal and Bhutan, the amount of
consideration for purchase of shares or convertible debentures of an Indian company on non-
repatriation basis, shall be paid only by way of inward remittance in foreign exchange
through normal banking channels.

Sale of shares under this scheme

i) The sale/maturity proceeds (net of applicable taxes) of shares purchased under this
Scheme shall be credited only to NRSR account where the purchase consideration was
paid out of funds held in NRSR account and to NRO or NRSR account at the option of
the seller where the purchase consideration was paid out of inward remittance or funds
held in NRE/FCNR/NRO/NRNR account.

ii) The amount invested in shares under this Scheme and the capital appreciation thereon
shall not be allowed to be repatriated abroad.

Annexure A
 List of activities or items for which automatic route of Reserve Bank for Investment from
Persons Resident Outside India is not available
1. Banking
2. NBFC's activities in Financial Services Sector
3. Civil Aviation
4. Petroleum including exploration/refinery/marketing
5. Housing & Real Estate Development sector for investment from persons other than
NRIs/OCBs.
6. Venture Capital Fund & Venture Capital Company
7. Investing companies in Infrasturcture & Service Sector
8. Atomic Energy & related projects
9. Defence and strategic industries
10. Agriculture (including plantation)
11. Print Media
12. Broadcasting
13. Postal services

Annexure B

Sectoral cap on Investments by Persons Resident Outside India

Sector Investment Description of Activity/Items/Conditions

Cap
1. Telecommunications 49% i) In basic, Cellular Mobile, paging and Value
Added Services, and Global Mobile Personal
Communications by Satellite subject to the
licence from Department of Telecommuni-
cation of Government of India.
100% ii) In manufacturing activities

2. Housing and Real Estate 100% ONLY NRIs/OCBs are allowed to invest
in the areas listed below :

a) Development of serviced plots and

construction of residential premises
b) Investment in real estate covering construction
of residential and commercial premises
including business centres and offices
c) Development of townships
d) City and regional level urban infrastructure
facilities, including both roads and bridges.
e) Investment in manufacture of building
materials
f) Investment in participatory ventures in (a) to
 (e) above
g) Investment in housing finance institutions

3. Coal and Lignite 49% i) in Public Sector Undertakings (PSU) and

50% ii) in other than PSUs
a)Where Private Indian companies are
setting up or operating power projects as
well as coal or lignite mines for captive
consumption;

b)For setting up coal processing plants

provided the company shall not do coal
mining and shall not sell washed coal or
sized coal from its coal processing plants in
the open market and shall supply the
washed or sized coal to those parties who
are supplying raw coal to coal processing
plants for washing or sizing.

c)For exploration or mining of coal or

lignite for captive consumption .

4. Drugs & Pharmaceuticals 74% For bulk drugs, their intermediaries and
Formulations (except those produced by The
use of recombinant DNA technology)

5. Hotel & Tourism 51% i) Hotels include restaurants, beach resorts, and
other tourist complexes providing
accommodation and/or catering and food
facilities to tourists.
ii) Tourism related industry includes travel
agencies, tour operating agencies and tourist
transport operating agencies, units providing
facilities for cultural, adventure and wild life
experience to tourists, surface, air and water
transport facilities to tourists, leisure,
entertainment amusement, sports, and health
units for tourists and Convention/ Seminar
units and organisations.

6. Mining 74% Exploration and mining of diamonds and

precious stones
100% Exploration and mining of gold and silver and
minerals other than diamonds and precious
stones, metallurgy and processing
7. Advertising 74% Advertising sector

8. Films 100% Film industry (i.e. film financing, production,

distribution, exhibition, marketing and
associated activities relating to film industry)
subject to the following:

i) Companies with an established track record in

films, TV, music, finance and insurance
ii) The company should have a minimum paid up
capital of US $ 10 million if it is the single
largest equity shareholder and atleast US $ 5
million in other cases
iii) Minimum level of foreign equity investment
would be US $ 2.5 million for the single
largest equity shareholder and US$ 1 million
in other cases
iv) Debt equity ratio of not more than 1:1 i.e.,
domestic borrowings shall not exceed equity
v) Provisions of dividend balancing would apply.
9. Any other sector/ 100% -----
activity (other than those
included in Annexure A)

Annexure E

List Of 22 Industries In Respect Of Which Dividend

Balancing Is Applicable

1. Manufacture of food and food products

2. Manufacture of dairy products
3. Grain mill products
4. Manufacture of bakery products
5. Manufacture and refining of sugar (vacuum pan sugar
factories)
6. Production of common salt
7. Manufacture of Hydrogenated oil (Vanaspati)
8. Tea processing
9. Coffee
10. Manufacture of beverages, tobacco and tobacco products
11. Distilling, rectifying and blending of spirits, wine
industries, malt liquors and malt, production of country
liquors and toddy
12. Soft drinks and carbonated water industry
13. Manufacture of cigar, cigarettes, cheroot and cigarette
tobacco
14. Manufacture of wood and wood products, furniture and
fixtures
15. Manufacture of leather and fur/leather products
16. Tanning, curing, finishing, embossing and japanning of
leather
17. Manufacture of footwear (excluding repair) except
vulcanised for moulded rubber or plastic footwear
18. Manufacture of footwear made primarily of vulcanised or
moulded products
19. Prophylactics (rubber contraceptive)
20. Motor cars
21. Entertainment electronics(VCRs, Colour TVs, CD Players,
Tape Recorders)
22. White goods(Domestic Refrigerators, Domestic
Dishwashing Machines, Programmable Domestic Washing
Machines, Microwave Ovens, Airconditioners).