Non Resident Investing in a Indian Company-Compliance under FCGPR – Whether he can use his NRO Account?
A private limited is incorporated in India. Mr. X who is in US and US citizen has an NRO account in India. He wants to transfer his money from his NRO account to the company for shares subscription
General Note on NRO account:
|S.no||Particulars||Remarks on NRO account|
|1||Who can open?||i) Any person resident outside India for putting through bonafide transactions in rupees.
ii) Individuals/ entities of Pakistan nationality/ origin and entities of Bangladesh origin require the prior approval of the Reserve Bank of India.
|3||Permissable Credits||i) Inward remittances from outside India, legitimate dues in India and transfers from other NRO accounts are permissible credits to NRO account.|
|4||Permissable Debits||i) The account can be debited for the purpose of local payments, transfers to other NRO accounts or remittance of current income abroad.
ii) Apart from these, balances in the NRO account cannot be repatriated abroad except by Non Resident Indian (NRIs) and Person of Indian Orgin (PIOs) up to USD 1 million, subject to conditions specified in Foreign Exchange Management (Remittance of Assets) Regulations, 2016.
|5||Repatriability||Not repatriable except for all current income.|
Query 1: Can a citizen of any foreign country do this
Since NRO accounts are held by the Non Resident in the present case he cannot utilise the funds in his NRO account to subscribe for the shares in an Indian company. Since NRO account is held for the purpose of making payments such as local payments or transfer between NRO accounts by a Non Resident.
Mode of Payment for share subscription can be the following:
An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures:
Query 2: If this can be done , is it repatriable
In case of a Non Resident only all current income can be repatriable.
Query 3: If he wants to do, will this be considered as Foreign Direct Investment.
What is FDI?
FDI means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. That is to say that any fraction of equity instruments held in an unlisted Indian company, the same will be regarded as FDI. However, in case of listed company, where 10% or more of the paid-up equity capital on a fully diluted basis is held by person resident outside India, it will be regarded as FDI. Fully diluted basis means taking into account all the possible conversion on account of issuance of warrants, ESOPs, Convertible securities issued by the listed company from time to time. In case an existing investment by a person resident outside India in equity instruments of a listed Indian company falls to a level below ten percent, of the post issue paid-up equity capital on a fully diluted basis, the investment shall continue to be treated as FDI.
A non-resident can invest in an Indian Company through the following instruments
a. Equity Shares
b. Compulsorily Convertible Debentures
c. Compulsorily Convertible Preference Shares
d. Share warrants
e. Convertible Notes by start-up
FDI entry routes:
FDI under sectors is permitted either through Automatic route or Government route.
Under the Automatic route, the non-resident or Indian company does not require any approval from GoI.
Whereas, under the Government route, approval form the GoI is required prior to investment. Proposals for foreign investment under the Government route are considered by the respective Administrative Ministry/Department.
Percentage of FDI allowed under different routes and List of Prohibited sectors under FDI is compiled in the below attached sheet.
Procedures for Investment under Government Route
Step 1: Filing of Application Proposal for foreign investment, along with supporting documents to be filed online, on the Foreign Investment Facilitation Portal, at the following URL: www.fifp.gov.in/
Step 2: Internal procedure for Approvals
Step 3: Final Approval Once the proposal is complete in all respects, the same gets approved within 8-10 weeks.
Mode of Payment for subscription of shares– Refer this link
Response to Query:
In the given query the US citizen investor can invest through the mode of payments mentioned above for subscription of shares. Since he is going to invest in Unlisted company the investment will be treated as FDI provided if he satisfies the payment mode.
Query 4: What are the procedures, in case this is considered as FDI.
Amendment under FEMA (Non Debt Instruments (NDI) ) rules,2019 under proviso to Rule 6
Investments by person resident outside India: -A person resident outside India may make investment as under:-(a) may subscribe, purchase or sell equity instruments of an Indian company in the manner and subject to the terms and conditions specified in Schedule I:
“Provided that an entity of a country, which shares land border* with India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country, shall invest only with the Government approval:
Provided further that, a citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the Government route, in sectors or activities other than defence, space, atomic energy and such other sectors or activities prohibited for foreign investment:
Any subsequent change in beneficial ownership by way of transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, will also require Government approval, if the beneficial ownership moves to an entity:
A. That is of a country that shares land border* with India;
B. Whose beneficial owner is situated in or is a citizen of any such country.
*Note: India shares its land border with countries such as Bangladesh, Pakistan, China, Bhutan, Afghanistan, Myanmar and Nepal
Who can Invest?
Any non-resident can subscribe/ purchase/ sell in equity and other eligible instruments of an Indian Company. Provided a person who is a citizen of, or entity which is incorporated in or investment in India, who beneficial owner is entity incorporated or citizen of, Bangladesh , Pakistan , China, Bhutan, Afghanistan, Myanmar and Nepal can’t make any foreign direct investment without the prior government approval. Further a citizen of Pakistan or an entity incorporated in Pakistan cannot invest in defence, space, atomic energy and sectors or activities prohibited for foreign investment even through the government route.
While any non-resident can invest in an Indian Company upto the limits allowed under various i.e. automatic route or government route etc.,
Every company having foreign investment (FDI), is required to report Reserve Bank Of India. Below two conditions need to be looked in to in case of FDI .
1. Foreign investment must be in compliant to FDI policy.
2. Securities issued must be in accordance with the Foreign Exchange Management.
What is FC-GPR?
Within 30 days from the date of issue of securities, the company shall file the Form FC-GPR with the RBI in Single Master. Before reporting the transactions the applicant needs to obtain the following details to avoid any hassle while filing the form.
Detailed steps as to how to file Form FC-GPR with RBI:
Now that all the above information and documents are obtained, The Form FC-GPR can be filed using the following steps:
Step 1- Registration for Business User (BU):-
Step 2: Logging in to firms:-
Step 3: Logging in to SMF and reach out to your work space:-
Step 4: Select the Return type- Form FC-GPR:-
Step 5: Common Investment details.
Step 6: Issue Details:-
Step 7: Foreign Investment Details:-
Step 8: Amount of Issue:-
Step 9: Particulars of Issue:-
Step 10: Shareholding Pattern:-
Step 11: Submitting the Form.
List of documents to be submitted along with Form FC-GPR:-
1. Declaration : As per the format given in the RBI user manual. To be attached as “other attachments”.
2. CS certificate: As per the format given in the RBI user manual. To be attached as “other attachments”.
3. Valuation certificate:As prescribed and applicable under FEMA 20(R). To be attached at “Valuation certificate”. For rights issue, valuation certificate is not required. A declaration (plain paper) may be attached that the rights issue to persons resident outside India is not at a price less than the price offered to persons resident in India.
4. Relevant acknowledgment lettersfor FC-TRS/FC-TRS filed for the original investment for rights or bonus issue. To be attached as “other attachments”
5. Board resolution : Only the relevant extracts. To be attached as “other attachments”
6. Memorandum of Association: if applicable. Relevant extracts to be attached as “other attachment”.
7. Merger/ Demerger/ Amalgamation:relevant extracts to be attached at the specified attachment “relevant approvals from the competent authority”.
8. FIRC and KYC :at the specified attachments.
Note that only following securities are considered under FDI.
The present case is about the Non resident (US citizen) wants to invest utilising his/her NRO account in shares of an unlisted private company. Since NRO account is not usable for investment purpose other than making local payments or transfer between NRO accounts. So the investor has to choose other methods of investment which is discussed above in this note. Since investment from Non Resident in an Indian Unlisted company is FDI, the transaction can be achieved by making a suitable method of investment through different payment channels other than NRO account in the present case.
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