Direct Investment by NRI/OCI in India

1. Who is an NRI and OCI

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As the name suggests, an NRI is a Non-Resident India, i.e. a person resident outside of India (PROI) who is actually an Indian Citizen. 

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On the other hand, an OCI, or Overseas Citizen of India, means an individual resident outside India who is registered as an Overseas Citizen of India cardholder under Section 7A of the Citizenship Act, 1955. The OCI card gives one permission to visit India multiple times for a lifelong period. OCIs enjoy similar economic, financial and education benefits as NRIs. OCIs holding a card for more than five years and those who have been living in India for at least one year are eligible for Indian citizenship.

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2. Permissible Capital Account Transactions by Persons Resident Outside India (PROI)

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While on one hand, current account transactions are permissible unless prohibited, on the other hand, capital account transactions are actually prohibited transactions unless specifically permitted.

2.1 Prohibition on Investment by PROI

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Under Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, PROI, including NRI/OCI, are prohibited from making investment in sectors mentioned below.

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• Business of chit funds (subject to authorization by Registrar Chits/Officer authorized by State Government)
• Agricultural or Plantation activities
• Nidhi Company
• Trading in TDR
• Real estate business or construction of the farmhouse
• Permissible capital account transactions by NRI/OCI

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Below are the permissible capital account transactions, and its related regulations, by Persons Resident Outside of India:

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3. Investment in Equity Instruments of Indian Company by NRI/OCI

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Investments in equity instruments of Indian Companies by PROI are governed by NDI Rules. A NRI/OCI can invest in equity instruments of an Indian Company either on repatriation or on non-repatriation basis. 

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1. An investment on repatriation basis means funds that are invested  (along with capital appreciation/profit) can be remitted outside of India too. 
2. Investment on non-repatriation basis means that the capital and its appreciation would not be allowed to be remitted outside of the territory of India but interest and dividend on such investment can be repatriated.

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4. Subscription/ Direct Allotment/ Purchase of Equity from Indian Company by NRI/OCI on Repatriation basis (Schedule-I)

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Under Schedule I of Foreign Exchange Management (Deposit) Regulations, 2000, An Indian Company may issue equity instruments to Persons Resident Outside of India, including NRI/OCI, subject to entry route, sectoral cap and attendant conditionalities. 

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However, if the investor or beneficial owner of investment under this schedule is a resident/citizen of the country that shares land border with India, then such investment, irrespective of entry route and sector, requires prior approval of the government. 

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Other than the above stated facts, PROI, including NRI/OCI, are prohibited to invest in the following sectors: –

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1. Lottery business (whether government or private) online/offline.
2. Gambling/betting including casinos.
3. Foreign technology collaboration in lottery/gambling.
4. Real estate business/construction of farmhouses.
5. Prohibited sectors for private investment viz (i) Atomic energy and (ii) Railway operations
6. Chit funds (except investment by NRIs/ OCIs on non-repatriation basis).
7. Nidhi company.
8. Trading in TDRs
9. Manufacturing of tobacco products /substitutes. However, FDI in other activities such as wholesale, cash & carry/retail trading etc. are permitted and governed by the sectoral restrictions.

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5. Permissible Investment by NRI/OCI on repatriation basis under (Schedule-III)

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Under Schedule III of Foreign Exchange Management (Deposit) Regulations, 2000, the following investments by NRI/OCI are permissible on repatriation/homecoming basis.

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5.1 Purchase/Sale of Equity Instrument on Recognized Stock Exchange of listed Indian Company

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Permission on purchase or sale of equity instrument on recognized stock exchange of listed Indian company subject to NRI/ OCI individual holding is restricted to 5% of the total paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or share warrants issued by an Indian company.

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Total holdings of all NRIs and OCIs in the company should not exceed 10% of the total paid-up equity capital on a fully diluted basis or paid-up value of each series of debentures or preference shares or share warrants.

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This limit may be increased by the company to 24% through special resolution in the general body.

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5.2 Purchase/Sale of Shares in Public Sector Enterprises

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Permission on purchase or sale of shares in public sector enterprises by an NRI/OCI are without any limit. Provided purchase of shares of public sector enterprises are made in accordance with the terms & conditions of inviting bids. 

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Payment for purchase of shares can be made out of foreign inward remittance or out of funds held in an NRE (PIS) Account. Sale proceeds (net of taxes) of equity instruments may be remitted outside India or may be credited to NRE (PIS) accounts.

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5.3 Purchase/Sale of Units of Mutual Funds that invest more than 50% in equity

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The purchase or sale of units of mutual funds, that invest more than 50% in equity, are permissible without any limit. Payment can be made out of foreign inward remittance or out of funds held in an NRE/FCNR(B) account. Sale proceeds net of tax may be remitted outside India or may be credited to an NRE(PIS)/FCNR(B)/NRO account.

5.4 Subscription to National Pension Scheme

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NRI/OCI may subscribe to National Pension Schemes (NPS) governed and administered by Pension Fund Regulatory and Development Authority (PFRDA), provided he/she is eligible to invest as per the provisions of the PFRDA.

Payment can be made out of foreign Inward remittance/out of funds held in an NRE/FCNR(B)/NRO account. Sale proceeds net of tax may be remitted outside India or may be credited to anNRE(PIS)/FCNR(B)/NRO account.

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6. Investment by NRI/OCI on non-repatriation basis under Schedule IV

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Since investment on non-repatriation basis is deemed to be domestic investment and treated at par with investment made by residents, hence, there is no limit for investment under this schedule. 

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An NRI/OCI or company, a trust or a partnership firm incorporated outside India and owned and controlled by NRI/OCI, may purchase or contribute, on non-repatriation basis in securities mentioned below: 

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• Equity instrument of listed/unlisted Indian Company
• Units issued by an investment vehicle without any limit
• Convertible notes issued by a startup company.

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[It is important to note that investment by NRI/OCI, should not be done in Nidhi company or a company engaged in agricultural/ plantation activities/real estate business/construction of farmhouse/dealing in TDR.]

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Here it may be noted that NRI/OCI would not be bound by the restriction imposed in Schedule I but would be governed by the restrictions imposed under Schedule IV. 

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Hence NRI/OCI can purchase the shares of the company engaged in even tobacco or lottery business on non-repatriation basis.

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Purchase or sale of units of domestic mutual funds which invest more than 50% in equity.

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Contribution to Capital in a firm/LLP/ proprietary concern by NRI/OCI on non-repatriation basis is permissible, without any limit, provided such firm or proprietary concern is not engaged in any agricultural or plantation activity or print media or real estate business.

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Payments for investment/capital contribution, on non-repatriation basis, can be made out of foreign inward remittance/NRE/ FCNR(B)/NRO account, however sale proceeds may be credited only to the NRO account of NRI/OCI.

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7. Investment in LLP on repatriation basis under Schedule VI

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• An NRI/OCI can contribute to the capital of an LLP operating in sectors where 100% foreign investment is permitted under automatic route and there are no FDI linked performance conditions. It is important that the investment in LLP should be in compliance with Limited Liability Partnership Act, 2008.

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• This Investment should not be less than the fair price worked out as per internationally accepted valuation norm duly certified by Chartered Accountant/Cost Accountant/Approved Valuer.

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• Transfer of capital contribution/profit share from a PRI to a PROI, should not be less than the fair price of capital contribution/profit share of LLP, and vice-versa.

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• Payment by NRI/OCI can be made from foreign inward remittance, or out of funds held in an NRE/FCNR(B) account. On sale, the proceeds can be remitted outside India or may be credited to a NRE/FCNR(B) account.

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8. Investment in an Investment Vehicle on repatriation basis under Schedule VIII

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NRI/OCI may purchase or sell or redeem the units of investment vehicles as per the regulations and directions laid out by SEBI and RBI. Payment can be made from foreign inward remittance/swap of shares, or out of funds held in an NRE/FCNR(B)/SNRR account. Sale proceeds net of tax, may be remitted outside India or credited to a NRE/FCNR(B)/SNRR account.

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9. Purchase/Sale of Indian Depository Receipt (IDR) under Schedule X

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NRI/OCI may purchase, hold, or sell IDRs. They should not be redeemable into underlying equity shares before expiry of one year from the date of issuance. Also, Payment can be made through foreign inward remittance or out of funds held in an NRE/FCNR(B) account.

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10. Transfer of Shares of Indian Company by NRI/OCI (Rule 9 & 13 of NDI Rules)

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11. Compliances on Transfer of Shares of Indian Company

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• On sale of equity instrument held by an NRI/OCI on non-repatriation basis to PROI intending to hold the shares on repatriation basis, Form FC-TRS should be filed with AD Bank within 60 days from the date of transfer of equity instrument or receipt or remittance of funds, whichever is earlier. Onus of reporting is on resident transferor / transferee or PROI holding equity instruments on a non-repatriation basis. Thus, if a NRI/OCI purchases the shares of an Indian Company on non-repatriation basis from PROI, then also Form FC TRS has to be submitted by them.

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• On disinvestment / transfer of capital contribution/profit share to a NRI/OCI Form LLP (II) should be filed with AD Bank within 60 days from the date of receipt of funds.