A clarification from India’s Ministry of Commerce & Industry Department for Promotion of Industry and Internal Trade has handed non-resident Indian a more attractive investment opportunity.
The department has decided that investments made by an Indian company that is owned and controlled by NRIs, on a non-repatriation basis, “shall not be considered for calculation of indirect foreign investment”.
Further, foreign investors can use the NRI route to gain greater control of Indian companies operating in sectors where certain limits are specified for foreign direct investment (FDI).
Foreign investors have been queueing up to enter the Indian market when sectors; such as multi-brand retail, insurance and banking, have been opened up for FDI.
In multi-brand retailing, FDI up to 51% is allowed; for insurance sector it is 49%, which is proposed to be raised to 74%.
In the banking sector, the FDI ceiling is increased to 74%.
Repatriable or non-repatriable
So far, non-repatriable NRI investments in Indian companies have not been counted as FDI but downstream investments by such firms are.
Rajagopal Ramesh, chief executive, Veracity Consulting, UAE, said: “This could open a window for foreign investors to raise their investments in Indian companies in sectors where FDI is capped, beyond the prescribed ceilings.
“NRI investments that are repatriable are treated as FDI while non-repatriable investments are considered as domestic investment. Downstream investment is an indirect FDI in which an NRI-owned company incorporated in India subscribes or acquires the shares of another Indian company.
“Investment on repatriation basis means the sale or maturity proceeds of an investment, after paying taxes, are eligible to be transferred out of India. In the case of non-repatriation investments, this cannot be transferred out of the country under Foreign Exchange Management Act (Fema).”
An NRI can invest up to 5% of the paid-up value of the shares of a listed company through a recognised stock exchange in India on repatriation basis, which is further subject to an overall limit of 10% for investments by all NRIs, in case the company has investments from more than one NRI.
The 10% limit can be increased to 24% through a special resolution passed by the company. Such investment is treated as ‘foreign portfolio investment’ as per the foreign exchange regulations.
Investment in an unlisted company by an NRI on repatriation basis is treated as ‘foreign direct investment’, which is subject to stricter valuation/pricing norms, sectoral restrictions and reporting requirements.
The department for promotion of industry and internal trade (DPIIT) recently clarified that downstream investment by a company owned and controlled by NRIs on non-repatriation basis will not be considered FDI.
“Investments by NRIs on a non-repatriation basis as stipulated under Schedule IV of Foreign Exchange Management (non-debt instruments) Rules 2019 are deemed to be domestic investment at par with the investments made by residents. Accordingly, an investment made by an Indian entity which is owned and controlled by NRI(s) on a repatriation basis shall not be considered for calculation of Indian foreign investment,” DPIIT said in a notification.
According to the existing guidelines, an Indian company is one that is both owned and controlled by resident Indians and violating any one condition could make the company foreign-owned.
At present NRI investment on non-repatriation basis is treated on par with rupee investment.
The clarification comes after a government review of the FDI policy in relation to investments made by an Indian company owned and controlled by NRIs on non-repatriation basis.
The clause was added in the guidelines for calculation of direct and indirect foreign investments.