The government plans to tighten investment norms for non-resident Indians (NRI) in companies to ensure that they do not violate foreign direct investment (FDI) sectoral caps or enter areas where such investment is banned. The Reserve Bank of India (RBI) has also mooted a proposal to withdraw the special status given to NRIs for investing in sectors such as aviation, housing and real estate.

NRIs, for example, are permitted to invest up to 100 per cent in air transport services as against only 49 per cent allowed to other foreign investors. Also, NRIs are exempt from the conditions imposed on minimum capitalisation norms in real estate as well as the minimum size of area to be developed for housing.

As a first step, RBI and the Department of Industrial Policy and Promotion have agreed on the need to scrap key clauses in Schedule 4 of the Foreign Exchange Management Act (Fema), which permits NRIs to invest in companies on a non-repatriation basis. The proposal is expected to be cleared soon. This window was given to NRIs so that they could utilise their domestic resources in their non-resident ordinary rupee account (NRO), which could not be repatriated outside India. In 2008, however, limited repatriation up to $1 million per year was allowed. At present, NRIs can put their money in Indian companies through the FDI route or invest in the shares of a company through the secondary market, also called portfolio investment, besides investing through a route that does not allow repatriation.

However, under the new definition of FDI under Press note 2 of 2009, investments by NRIs through the non-repatriation route is not included while calculating the sectoral caps for FDI in a company. But NRI investments through the FDI route or the portfolio investment route is included in calculating sectoral caps. RBI has argued that this provides the NRIs an opportunity for “regulatory arbitrage”. In simple terms, an NRI can invest, say in a telecom company directly via the FDI route or through portfolio route upto 74 per cent, which is the sectoral cap, and then acquire, say an additional 10 per cent through the non-repatriation route, which takes his total investment to 84 per cent, and violates the sectoral cap in telecom.

As the policy does not make it mandatory for an NRI to report to the government the 10 per cent equity he has picked on non-repatriation basis, RBI argues that it “escapes the gaze of regulatory and supervisory institutions”. NRIs can also use the non-repatriation route to invest in the equity of companies were FDI is banned or it is in the negative list. These include retail trading (except single brand product retailing), atomic energy, lottery business and gambling and the betting sectors. The government is also considering a proposal by RBI for withdrawal of special status given to NRIs in order to close any “possible arbitrage”. However, some government departments are not in favour of such a move.

Besides aviation, in the real estate sector FDI policy has imposed certain key conditions like the minimum area to be developed should be 10 hectares in case of development of serviced housing plots, and built up area of 50,000 square metres in case of construction development projects. But these restrictions do not apply on NRIs.

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Telegram

taxguru on telegram GROUP LINK

Download our App


More Under Corporate Law

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

February 2024