Homeward bound

By: and |
Published: December 25, 2015 1:02 AM

According to a July 2014 report by the Migration Policy Institute, 2.6 million Indian immigrants live in the US, making it the third largest immigrant population in that country.

According to a July 2014 report by the Migration Policy Institute, 2.6 million Indian immigrants live in the US, making it the third largest immigrant population in that country. The report added that remittances from migrants form a relatively small part of the GDP of India (about 3.7%) but constitute the world’s largest inflow in absolute terms with inward remittances of around $67 billion (in 2013 alone).

In its diaspora, India has assets which can contribute immensely to economic growth. However, till some time ago, the regulatory framework was not the most conducive. For example, if an NRI was to invest through his company based in the US, such investment would be considered as foreign investment, and would need to comply with restrictions imposed under exchange control laws.

But the NDA seems to have done its bit in shaking up the regime here. In June 2015, using one of its press notes, the government broadened the definition of NRI to include Overseas Citizen of India card-holder. The earlier definition only included individual residents outside India who are citizens of India and persons of Indian origin. The same press note modified the FDI Policy to state that investment by NRIs under Schedule 4 of exchange control regulations (FEMA regulations) is deemed to be domestic investment, at par with the investment made by residents. Taking this further, under another press note in November 2015, this benefit available to NRIs was extended to companies, trusts and partnership firms that are incorporated outside India and are owned and controlled by NRIs. So, such entities will be treated at par with NRIs for investment in India.

The two questions that emerge are, what are the advantages of the policy change and what is the ‘fine print’?

Currently, under FEMA regulations, any investment by NRIs under Schedule 4 is on a non-repatriation basis, i.e. the amount invested in India as well as capital appreciation is not permitted to be repatriated abroad. But there has been some ambiguity on whether such investment by NRIs is subject to sectoral caps, pricing guidelines, cap on coupon rate, which are applicable in case of regular FDI in India by non-residents, including NRIs (on repatriable basis).

The proposed amendment states that investments made under Schedule 4 would be deemed to be domestic investment. It brings clarity that the restrictions mentioned above would not be applicable in case of NRIs investing on non-repatriation basis. However, what does the phrase ‘at par’ mean (as against ‘same as’), and in what ways are investments by NRIs under Schedule 4 different from investments by residents?

If investments by NRIs are considered ‘at par’ and not ‘same as’ investments by residents, then any transfer of shares by an NRI to a non-resident will continue to require FIPB’s approval. This is in contrast to the fact that transfer of shares between two non-residents does not require the approval of FIPB, when the investee company operates in an automatic sector. What Schedule 4, thus, does is it locks in the capital of NRIs. So, while recent changes in the regime give an incentive to NRIs to invest in India, they still have a limited reason to invest if they do not plan to return to India or don’t have a family here.

There is a potential silver lining for Indian companies seeking or having foreign investments, and looking to further make downstream investments into other Indian companies. The FDI policy provides that downstream investment by an Indian company—which is not owned and/or controlled by a resident entity—into another Indian company would be in accordance with relevant sectoral conditions on entry route, conditionalities and caps, with regard to the sectors in which the latter Indian company is operating. In determining whether an Indian company is foreign-owned and controlled (with 50% or more shareholding held by non-residents or non-residents having the right to appoint majority of directors or controlling policy decisions), it could be that investment by NRIs on non-repatriation basis would not be included. This could be helpful for investee companies for calculation of shareholding for downstream investment where there are limitations in the form of sectoral caps or specific conditions/approvals in case of foreign investment.

Having, while an assured return cannot be given to a foreign investor, can under the new regime NRIs be given assured return (considering their investments are at par with the residents)? Also, it will be interesting to note what structures emerge which permit NRIs to take funds out of India, even though the initial investment was made on a non-repatriable basis.

Shankar is partner and Jindel is senior associate, J Sagar Associates, Advocates and Solicitors. Views are personal

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