Foreign Exchange Management Act, 1999 (FEMA) was enacted for the proper management of foreign exchange and payments. The Act had replaced the Foreign Exchange Regulation Act, 1973 (FERA) to facilitate the international trade and support the growth of Indian Foreign Exchange Market. Unlike FERA, the main objective of FEMA is to facilitate external trade, payments and for promoting the orderly development and maintenance of foreign exchange market in India.1
As per the provisions of FEMA, a person who is a resident of India is any person who is residing in India for more than 182 days. A non-resident Indian (NRI) is a person resident outside India, who is of Indian origin (PIO) or who is an Indian citizen (NRI) and that person has been residing out for his employment or for other purpose for which his intention to stay outside is for an uncertain period. A person of Indian origin can be a person who is holding an Indian passport or whose parents or grandparents are Indian. The laws relating to NRI is governed by the Foreign Exchange Management Act, 1999 (FEMA), the regulations of the Securities and Exchange Board of India (SEBI), Foreign Direct Investment Policy (FDI) and also by the master circulars issued by the Reserve Bank of India (RBI).2
The Indian government is aiming to capitalise on the country’s favourable business climate by lowering restrictions and even introducing new legislation. Changes in government policy, the availability of low-cost resources, tax incentives, the relaxation of foreign commercial borrowing laws, and other reasons have all contributed to increased NRI investments in India. Non-resident Indians (NRIs) can immediately invest in agriculture, mining, industrial explosives, hazardous chemicals, medications and pharmaceuticals, transportation, insurance, industrial parks, non-banking financial institutions, and other enterprises. In some circumstances, clearance from the Foreign Investment Promotion Board (FIPB) is required. These include single-brand retailing, newspaper and magazine publishing, courier services, and non-telecom infrastructure companies.
By the enactment of the FEMA which has led to the liberalisation in external trade and development in the foreign exchange market, the investments by the NRIs have increased. Presently, India has become one of the favourite spots for the investments by the non-resident Indians. It is also pertinent to say that India is second to China in terms of preferred investment locations. The investment opportunities have widened due to the enactment of the Foreign Exchange Management Act (FEMA), in 1999. India has also reduced their company taxes and rationalised its labour laws. This article discusses on the various ways in which an NRI can invest in India. Some of the ways in which investments can be made are discussed below.
The portfolio investment scheme (PIS) allows non-resident Indians (NRIs) and persons of Indian origin (PIOs) to invest in India’s primary and secondary capital markets. Under this policy, NRIs can buy shares/debentures in Indian companies on Indian stock exchanges.3 On a daily basis, the Reserve Bank of India examines the limits on NRI investments in Indian enterprises. The Reserve Bank has set cut-off points for effective monitoring of foreign investment ceiling limitations that are two percentage points lower than the actual levels. The cut-off point, for example, is set at 8% for enterprises in which NRIs/PIOs can invest up to 10% of the company’s paid-up capital.4
Except in some areas or activities, a non-resident entity may invest in India. These investments are subject to Foreign Exchange Management Act (FEMA) and FDI policy requirements, including sectoral caps. An Indian company may get FDI through the automatic route, which allows FDI into industries covered by the FDI policy without prior approval from the government or the RBI. These are frequently long-term investments. The Foreign Investment Promotion Board (FIPB), the Department of Economic Affairs, and the Ministry of Finance are in responsibility of reviewing FDI applications for non-automatic route operations.
These investments must be carried out in accordance with FEMA criteria. A mutual fund is a method of investing in equities or fixed deposits that is not direct. Non-resident Indians and Persons of Indian Origin can invest in mutual fund schemes in India. In the case of NRIs, no specific approval from administration, such as the RBI, is required. They have the option of investing in mutual funds on a repatriable or non-repatriable basis. To invest on a repatriable basis in an NRE or FCNR account with an Indian bank. In this regard, the investment funds should be transferred via common banking channels or from the NRI investor’s NRE/FCNR account. Investment can also be made on a non-repatriation basis, with the investment fund coming from the NRI shareholder’s NRO account. Non-repatriation investments can also be made, with investment coming from the shareholder’s NRO account or NRE/FCNR account. Equity Mutual Funds invest in stocks, whereas Debt Mutual Funds engage in fixed deposit-like products. Hybrid Funds are a hybrid of the two.
A non-resident Indian (NRI) can invest in any proprietary or partnership concern in India engaged in any industrial, commercial, or trading activity on a non-repatriation basis, and any sum invested by the NRI in that proprietary or partnership concern, as well as any income accruing to such person as a result of profit on his investments, is exempt from taxation.5 The general approval is subject to the following conditions that the sum invested by an NRI must be remitted from abroad through conventional banking channels or transferred from the investor’s NRE/FCNR/NRO accounts with an Indian bank. Another requirement is that the proprietary or partnership concern in India is not involved in any agricultural/plantation activity or real estate business that deals with land and immovable property with the intent of profiting or earning income from it. Furthermore, the money invested and the income earned is not eligible for repatriation to any location outside of India and are payable solely in non-repatriable Indian rupees.
One of the most common methods to invest in India by the NRIs is through the purchase of immoveable property in India. An individual who is a non-resident in India can buy property other than the agricultural land or farm house or a plantation property out of repatriable or non-repatriable fund. A person not resident in India can acquire the property by way of gift or through transfer from a person resident outside India or from a person of Indian origin. Also, he can acquire the property through inheritance from another non-resident who has acquired the property through the laws relevant during the time of acquiring the immovable property or after obtaining the permission from the RBI. He can also transfer the property to person resident in India. When a property is transferred, the NRIs can repatriate their sale proceeds by following certain regulations.
Also, in order to hold and maintain bank accounts in India, the NRIs can hold them without the permission of the Reserve Bank of India. They can create and maintain ordinary non-resident rupee (NRO) savings account with the Post Offices in India except for the individuals who are from Pakistan or Bangladesh. The NRIs can hold savings, current and fixed deposit accounts without the permission of the RBI. The person can hold the account jointly with a resident in India and also permanently hold it as a resident account. The non-resident (external) rupee account which is also called as the NRE account can be maintained for transactions for converting freely the foreign currency and all the balances and the interest is exempt from tax. Foreign Currency (Non Resident) Account (FCNR) can be maintained by the NRIs and can be opened in Pound Sterling, U.S. dollar, Deutsche Mark and Japanese Yen. However, the deposit can only be maintained for six months to three years and the account is also exempt from tax. And lastly, another account that can be maintained by the NRIs is the Non Resident (Non Repatriable) Rupee Deposit Scheme (NR-NR-RD Scheme), in which they can invest in term deposits maintained out of funds transferred in India in freely convertible foreign currency through proper banking channels. This account is kept in Indian rupees and can be maintained only for a period of six months to three years.
Therefore, it can be noted that India now has significant investments. The right potential grades for financial development of firms in India, political stability of the territory, excellent asset grades, and attractive foreign investment rules have all contributed to the creation of an ideal environment for investors to invest in India. When investing funds to India, investors must exercise extreme prudence. Choosing a credible economic counsellor is one strategy to reduce the danger of deceit or wrong recommendations.
1The Foreign Exchange Management Act, 1999 (42 of 1999), Preamble
2Investment Schemes for NRI in India and Guidelines for them, Sravanthi S., International Research Journal of Social Sciences, Vol. 2(11), 37-40, November (2013)
4Ibid.
5Notification No. FERA 113/92-RB dated 27th April, 1992 part 9(1) read with part 29(1) of FERA, 1973, RBI
Merlin Priscilla Thomas
Legal Researcher, SMA Legal
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