Reserve Bank of India (RBI), vide notification FEMA.361/2016-RB on 15th February, 2016 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016 (present notification) effective from the even date.
This write-up discusses the changes made by way of the present notification in the definition of NRI and the Schedules to the principal regulation that govern the investments made by NRI on repatriation basis under portfolio investment scheme (Schedule 3) and Investment made on non-repatriation basis (Schedule 4).
Definition of NRI was amended in the consolidated FDI policy vide DIPP press note no 7 dated 3rd June, 2015 to mean an individual resident outside India who is a citizen of India or is ‘Overseas Citizen of Indian Origin’ cardholder within the meaning of section 7(A) of the Citizenship Act, 1955. Person of Indian Origin’ cardholders registered as such under Notification No. 26011/4/48 F.I, dated 19.8.2002, issued by the Central Government are deemed to be ‘Overseas Citizen of India’ cardholders.
The previous definition under the principal regulation defined NRI to have meaning assigned under Foreign Exchange Management (Deposit) Regulations, 2000 which defines NRI to mean a person resident outside India who is a citizen of India or is a person of Indian origin.
The present notification aligns the definition with the definition provided by DIPP as under:
“Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.”
Section 7(A) of the Citizenship Act, 1955 provides that-
“the Central Government may, subject to such conditions and restrictions as may be prescribed, on an application made in this behalf, register any person as an overseas citizen of India-
(a) any person of full age and capacity,-
i. who is citizen of another country, but was a citizen of India at the time of, or at any time after, the commencement of the Constitution; or,
ii. who is citizen of another country, but was eligible to become a citizen of India at the time of commencement of the Constitution; or
iii. who is citizen of another country, but belonged to a territory that became part of India after the 15th day of August, 1947; or
iv. who is child or grand-child of such a citizen; or
(b) a person, who is a minor child of a person mentioned in clause (a):
Provided that no person, who is or had been a citizen of Pakistan, Bangladesh or such other country as the Central Government may, by notification in the official Gazette ,specify, shall be eligible for registration as an overseas citizen of India.”
Regulation 5 of principal regulation deals with permission for purchase of shares by certain persons resident outside India. Regulation 5 (3) enabled NRIs to purchase shares or convertible debentures of an Indian Company on a Stock Exchange under Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3 and purchase shares or convertible debentures of an Indian company on non-repatriation basis other than under Portfolio Investment Scheme subject to the terms and conditions specified in Schedule 4.
The present notification replaces shares or convertible debentures with securities or units and the revised Regulation 5 (3) reads as under:
“(i) A Non- Resident Indian (NRI) may acquire securities or units on a Stock Exchange in India on repatriation basis under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3.
“(ii)A Non- Resident Indian (NRI) may acquire securities or units on a non-repatriation basis, subject to the terms and conditions specified in Schedule 4.
The definition of “Securities” shall be construed from Regulation 2 sub-regulation (h) of the Securities Contracts (Regulation) Act, 1956, which states that “securities” include—
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;
Whereas, the definition of “unit” shall be construed from Regulation 2 sub-regulation (xi A) of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000, which states that “unit” shall mean-
“beneficial interest of an investor in the Investment Vehicle and shall include shares or partnership interests”.
The present notification substitutes Schedule 3, gist whereof has been provided hereunder:
The scope of investment by NRIs on non-repatriation basis under Schedule 4 by enabling an NRI, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by an NRI to acquire and hold, on non-repatriation basis, equity shares, convertible preference shares, convertible debenture, warrants or units. Such investment will be regarded as domestic investment at par with the investment made by residents.
NRIs may, without any limit, do the following:
The prohibited sectors for investment remains same as before, viz. Nidhi company or a company engaged in agricultural/plantation activities or real estate business or construction of farm houses or dealing in Transfer of Development Rights. Chit fund has not been included in the revised list.
Another amendment has been in the meaning of real estate business provided in the amended Schedule 4. Previously, exclusion list was specified in case of real estate business. However, in line with the amendment made vide DIPP press note 12, meaning of real estate business as provided as an explanation in Schedule 4 has been amended as under:
“Real estate business” means dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, construction of residential commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent income on lease of the property, not amounting to transfer, will not amount to “real estate business”. Investment in units of Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) regulations 2014 shall also be excluded from the definition of “real estate business”.
Amendments with respect to Investment Vehicle and Units were made in the principal regulations vide Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Eleventh Amendment) Regulations, 2015 issued vide Notification No. FEMA. 355/2015-RB dated November 16, 2015. Corresponding amendment was also made in the meaning of real estate business provided under Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 vide Notification No. FEMA. 345/2015-RB dated November 16, 2015.
The present notification aligns the provisions relating to NRIs and investment by NRIs in the principal regulations with amendments made vide the aforesaid notifications and DIPP press note 12 of 2015.
 Foreign Exchange Management (Transfer or issue of securities to person resident outside India) Regulations, 2000
(Author is Associated with Vinod Kothari and Company)