The Citizenship (Amendment) Act, 2015 and major overhauls to galvanize expat investments (Part 3)

Further to our previous post, this post seeks to examine the major overhauls brought in by GOI to engage more meaningfully with Indian expats post promulgating the Ordinance.

The GOI has brought in a series of reforms to liberalize India’s foreign investment policy and create a conducive legal and regulatory environment for foreign investment. To help the country step up from years of economic stagnation and install investor confidence, the GOI is exploring manifold avenues to bring in an upward growth trajectory.

Following are some of the major regulatory changes brought about by RBI and DIPP:

1. Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Fifteenth Amendment) Regulations, 2016

Vide notification dated 10 January 2017, RBI has inserted a new clause (iiA) in Regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (”Principal Regulations”) to define ‘convertible note’ as an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

Further, RBI has inserted a new Regulation 6D which talks about issue of convertible notes by start-up companies and 6D (4) enumerates that NRIs may now acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Principal Regulations.

In our previous post on the Start-up India Action Plan, we have discussed the various benefits announced for ‘eligible’ start-ups (as notified vide Department of Industrial Policy and Promotion’s (“DIPP”) notification dated 17 February 2016) and the regulatory changes that have been brought about thereafter. This amendment to the Principal Regulations is in furtherance to the objective of bringing in policy changes towards growth and development of start-ups.

 

2. Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016.

Vide notification dated 15 February 2016, RBI has notified key amendments to the Principal Regulations:

Definition of NRI amended

Under Regulation 2 (viia), NRI has now been defined as an individual resident outside India who is a citizen of India or is an “Overseas Citizen of India” cardholder within the meaning of Section 7(A) of the Citizenship Act, 1955.

Investments by NRI

Under Regulation 5 (3), NRI’s may now acquire securities or units on a Stock Exchange in India on repatriation basis under the Portfolio Investment Scheme (“PIS”), subject to the terms and conditions specified in Schedule 3 and on a non-repatriation basis, subject to the terms and conditions specified in Schedule 4.

Further, the entire Schedule 3 and Schedule 4 to the Principal Regulations stand revised. Highlights of the same are provided below:

Schedule 3:

  • Previously, under the PIS, NRIs were permitted to purchase / sell shares and/or convertible debentures through a branch designated by an authorized dealer for the purpose. However, NRIs are now permitted to purchase / sell convertible preference shares / warrants and units as well.
  • Previously, it was not permissible for the paid-up value of each series of convertible debentures purchased by each NRI on repatriation and non-repatriation basis to exceed five percent of the paid-up value of each series of convertible debentures issued by the company concerned. However, NRIs are now permitted to purchase convertible preference shares and the limit on investments on non-repatriation basis has been eliminated.
  • Further, the paid-up value of warrants of any series purchased by any individual NRI on repatriation basis should not exceed five percent of the paid-up value of warrants of that series issued by the company concerned.
  • The aggregate paid-up value of any of the securities of any company purchased by all NRIs on repatriation basis should not exceed ten percent of the paid-up value of that respective series of security.
  • Investment shall be subject to the provisions of the FDI policy and Schedule 1 of the Principal Regulations in respect of sectoral caps wherever applicable.
  • An NRI may open a designated NRE (PIS) Account for routing the receipt and payment for transactions relating to sale and purchase of securities and units under Schedule 3.
  • Sale proceeds of securities or units acquired by modes other than PIS shall not be credited in the NRE (PIS) account and vice-versa.
  • New addition to permitted debits: Remittances outside India or transfer to NRE / FCNR (B) accounts of the account holder of the NRI or any other person eligible to maintain such account.
  • Existing NRO (PIS) accounts may be re-designated as NRO account.

Schedule 4:

An NRI, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by NRIs, may acquire and hold, on non-repatriation basis, securities or units, which will be deemed to be domestic investment at par with the investment made by residents. Further, an NRI may,

  • acquire, on non-repatriation basis, any security issued by a company without any limit either on the stock exchange or outside it.
  • invest, on non-repartition basis, in units issued by an investment vehicle without any limit, either on the stock exchange or outside it.
  • contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietary firm or a Limited Liability Partnership without any limit.

 

3. DIPP – Press Note No. 7 (2015 Series) – Review of FDI Policy on Investments by NRIs, PIOs and OCIs

Vide press note dated 3 June 2015, GOI has reviewed and amended the FDI policy on investments made by NRIs, PIOs and OCIs to bring about parity in investment norms. The amendments have become effective from 18 June 2015.

NRI under the Consolidated Policy will now be defined as an individual resident outside India who is a citizen of India or an OCI cardholder. Furthermore, it clarifies that under Schedule 4 of the Principal Regulations, investments by such NRIs will be treated as domestic investments at par with the investment made by residents and will not be subject to FDI caps.

It also states that the words NRI and PIO appearing in the Consolidated Policy will be deemed to have the same meaning.

 

The next post seeks to examine the access provided by RBI to NRIs towards the exchange traded currency derivatives’ market and relaxations brought about in the extant guidelines for subscription to chit funds by NRIs.

 

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