WHETHER PERSON RESIDENT INDIA INVEST ON OVERSEAS LISTED STOCK EXCHANGES?

As an investor, have you ever wondered if you could diversify your portfolio by holding international shares of companies such as Twitter, Facebook, Walmart, etc.? These companies aren’t listed on the Indian Stock Exchanges. Then how can you add these shares in your portfolio and what are compliances that one needs to take care of while proceeding of !!

Investments in foreign company can be by two type of persons:

1. Individual Resident

2. Company or any other person other than resident individual

The provisions relating to investments by Resident Individuals and Indian Party are different and we have in this article dealt with the requirements to be complied by resident individual.

OVERSEAS INVESTMENTS BY RESIDENT INDIVIDUAL:

Question: Suppose Mr. A desires to make investment in shares of a foreign company. He seeks guidance on the relevant provisions and routes available to him under FEMA?

Answer:

Under LRS, resident individuals can freely remit up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both

 Permissible capital account transactions by an individual under LRS includes:

1. making investments abroad – acquisition and holding shares of both listed and unlisted overseas company or debt instruments; acquisition of ESOPs; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes;

2. setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from August 05, 2013) outside India for bonafide business subject to the terms & conditions stipulated in Notification No FEMA. 120/RB relating to overseas direct investments.

Under FEMA 120, “Direct investment outside India” means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment.

The term ‘portfolio investments’ is not defined in FEMA or in any of its regulations. The Advance Law Lexicon defines the term ‘portfolio investment’ as “the purchase of foreign financial asset with the purpose of deriving returns from the security without intervening in the management of the foreign operations.

Therefore, the route available to Mr. A depends on whether his investment in foreign company is for undertaking business with participation / control in decision making by him or is “hands-off” i.e. in nature of portfolio investment.

  • The maximum amount of investment in foreign shares by resident individual is limited to the LRS limit of US$ 250,000 whether through LRS or through ODI route
  • If Mr. A’s case falls under ODI route, it is subject to conditions specified in Schedule V of FEMA Ntf. 120. The following conditions are more restrictive in case of ODI by individual compared to ODI by a company/registered partnership firm/LLP:

1. The JV or WOS, to be acquired/set up by a resident individual under Schedule V, shall be an operating entity only and no step down subsidiary is allowed to be acquired or set up by the JV or WOS

2. The financial commitment by a resident individual to/on behalf of the JV or WOS, other than the overseas direct investments as defined under Regulation 2(e) read with Regulation 20A of this Notification, is prohibited. As per said definition, investment is permissible only by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity; hence it may not be possible for Mr. A to grant loan to or issue guarantee on behalf of his JV/WOS abroad

AUTHOR’S OPINION

In opinion of author it is evident the definition of Direct investment outside India, investment in the nature of portfolio investment does not fall under the same and hence is outside the purview of provisions specified in Ntf. FEMA 120 relating to overseas direct investments.

 FOR ANY FEMA/TAXATION QUERIES CONTACT AT: guptaparag257@gmail.com

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