Exchange Control - Foreign Investments in India (Part: 2)
Transfer of Shares and convertible debentures - Non-resident to Resident &
Resident to Non-Resident- General Permission

• 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); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged.

• NRI or OCB may transfer by way of sale or gift the shares or convertible debentures held by him or it to another non-resident Indian; provided transferee 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 convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged.

• The person resident outside India may transfer any security to a person resident in India by way of gift

• A person resident outside India may sell the shares and convertible debentures of an Indian company on a recognised Stock Exchange in India through a registered broker.

A person resident in India who proposes to transfer any share or convertible debenture of an Indian company by way of sale or gift to a person resident outside India will have to obtain prior approval of FIPB, Ministry of Finance & Company Affairs, Govt of India followed by permission from RBI. The above two stage approval are applicable even when the transfer is made on non-repatriation basis. A person resident outside India holding shares/convertible debentures of an Indian company may transfer by way of sale to a person resident in India by obtaining prior permission from RBI in form TS 1.

Price of shares issued to persons resident outside India under Schedule-I, would be worked out on the basis of SEBI guidelines in case of listed shares. In other cases valuation of shares would be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.

An Indian company issuing shares or convertible debentures under bonus, rights, amalgamation and stock option in accordance with these Regulations should submit to Reserve Bank the details of advance remittance, not later than 30 days from the date of receipt of the amount of consideration , giving details regarding

• Name and address of the foreign investors

• Date of receipt of funds and their rupee equivalent

• Name and address of the authorised dealer through whom the funds have been received, and

• Details of the Government approval, if any

After the issue of shares the company should file a report in Form FC-GPR not later than 30 days from the date of issue of shares with the Regional Office of RBI where the registered office of the company is situated.

Reserve Bank may, permit an Indian company issuing shares to persons resident outside India under Schedule I to FEMA Notification No. 20 (i.e. under the FDI scheme) , to retain the subscription amount in a foreign currency account, subject to such terms and conditions as it may stipulate

Foreign Institutional Investors registered with SEBI and Non-resident Indians are eligible to purchase the shares and convertible debentures under the Portfolio Investment Scheme. The FII should apply to the designated AD who may then grant permission to FII for opening a foreign currency account and/or a Non Resident Rupee Account . NRIs should apply to the concerned AD designated bank for permission to open a NRE/NRO account with its designated branch.

In the case of FIIs, the total holding of each FII/SEBI approved sub account 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 an Indian company and the total holdings of all FIIs/sub-accounts of FIIs 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 by its Board of Directors followed by passing of a special resolution to that effect by its General Body.

The FIIs are also permitted to trade in all exchange traded derivative contracts subject to certain limits. ADs can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments. FIIs are not permitted to invest in Print Media Sector through FDI or PIS routes. Such investment by FII requires prior approval of Government of India, Foreign Investment Promotion Board and Ministry of Information & Broadcasting.

Registered FIIs have been permitted to purchase shares/convertible debentures of an Indian company through offer / private placement. This is subject to applicable ceiling as indicated in Schedule 2 to Notification No. FEMA 20/2000-RB dated May 3,2000. It is clarified that a FII may invest in a particular issue of an Indian company either under Schedule 1 or Schedule 2. The ADs may 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 company who has issued the shares to the FIIs under Schedule 1 (FDI) ( for which the payment has been received directly into company’s account ) and under Schedule 2 ( for which the payment has been received from FIIs account maintained with Authorised Dealer in India ) should report these figures separately under item 4(b) of the FC-GPR return so that the details could be suitably reconciled for statistical / monitoring purposes.

The FII shall restrict allocation of its total investment between equities and debt including dated Government Securities and Treasury Bills in the Indian Capital Market in the ratio of 70:30. The FII can also form a 100% Debt Fund and get registered with SEBI for investment in debt investments. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard.

In the case of NRIs under PIS it is to be ensured that the paid-up value of shares/ convertible debentures purchased by an NRI under PIS route should not exceed 5% of the paid up capital/ paid up value of each series of debentures. The aggregate paid-up value of shares/ convertible debentures purchased by all NRIs should not exceed 10% of the paid-up capital of the company/paid-up value of series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company concerned passes a special resolution to that effect. The NRI investor should take delivery of the shares purchased and give delivery of shares sold. Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis and by inward remittance or out of funds held in NRE/FCNR/NRO account of the NRI concerned, maintained in India where shares/debentures are purchased on non-repatriation basis.

The link office of the designated branch of an AD shall furnish to the CGM, RBI, ECD, CO, Mumbai a report on a daily basis on PIS transactions undertaken by it, such report to be furnished on-line or on a floppy in a format supplied by RBI.

NRI may invest in Exchange Trade Derivative Contracts approved by SEBI from time to time out of INR funds held in India on non-repatriation basis subject to the limits prescribed by SEBI. NRIs may also purchase on repatriation basis, Govt dated securities, Treasury bills, units of domestic Mutual funds bonds issued by public sector undertakings and shares in public sector enterprise being divested by the Govt of India.

With effect from November 29, 2001, OCBs are not permitted to invest under the PIS in India. Further, the OCBs that have already made investments under the Portfolio Investment Scheme, may continue to hold such shares/convertible debentures till such time these are sold on the stock exchange.

OCBs have been derecognised as a class of investor entity in India with effect from September 16 2003. However, requests from such entities which are incorporated and not under the adverse notice of RBI/SEBI will be considered for undertaking fresh investments under FDI scheme with prior approval of Government if the investment is under Govt. route and with the prior approval of RBI if the investment is under automatic route.

There is no limit on NRI purchasing shares/ convertible debentures issued by an Indian company on non-repatriation basis whether by public issue or private placement. 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.

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.

Foreign Institutional Investors can buy dated securities/ treasury bills, 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 recognised stock exchange in India.

NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in Indian Securities on repatriation basis subject to the condition that the amount of consideration for such purchase on repatriation basis shall be paid only by way of inward remittance in free foreign exchange through normal banking channels or by debit to their NRE/ FCNR(B) accounts.

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 shall not be allowed to be repatriated abroad

A SEBI registered Foreign Venture Capital Investor (FVCI) with general permission from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or in a Venture Capital Fund( VCF) or in a Scheme floated by such VCFs subject to the condition that the VCF and IVCU should also be registered with SEBI. They can purchase equity/equity linked instruments/ debt/debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement or in units of schemes/ funds set up by a VCF. RBI, on application, may permit a FVCI to open a foreign currency account or rupee account with a designated branch of an authorised dealer. The purchase/ sale of shares, debentures, units can be at a price that is mutually acceptable to the buyer and the seller /issuer. ADs are also authorised to offer forward cover to FVCIs to the extent of total inward remittance net of investments liquidated.

Regulations regarding Acquisition and Transfer of Immovable Property in India is covered in the next page along with Investment in Partnership Firm/Proprietary Concern