The Reserve Bank of India notified Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, vide Notification No.FEMA 20/2000-RB dated 3.5.2000. These Regulations came into force from 1.6.2000. These Regulations seek to regulate investment in India by persons resident outside India, i.e. issue of any security by an Indian entity to a person resident outside India and purchase, sale of Indian securities by a person resident outside India. Thus, the Regulations regarding the purchase of shares, securities, units as also investment under Foreign Direct Investment Scheme, etc. are all contained in these Regulations. These have been amended on 3.10.2003. (For the latest provisions please refer to the RBI.)
The salient features of Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000, are given below:
- These regulations seek to regulate investment 1in India by persons resident outside India, i.e. issue of any security by an Indian entity to a person resident outside India and purchase, sale of Indian securities by a person resident outside India.
- For the purpose of these Regulations the investment in India by person resident outside India has been divided in five categories and the regulations applicable have been specified in respective schedules, as given on next page.
Schedule 1 — Foreign Direct Investment Scheme
Schedule 2 — Investment by Foreign Institutional Investors under Portfolio Investment Scheme
Schedule 3 — Investment by NRIs/OCBs under Portfolio investment Scheme
Schedule 4 — Purchase and sale of shares by NRIs/OCBs on non-repatriation basis
Schedule 5 — Purchase and sale of securities other than shares or convertible debentures of an Indian company by persons resident outside India.
Schedule 6 — Investment in an Indian V.C. by foreign V.C. Investor
- Citizens of Bangladesh, Pakistan or Sri Lanka resident outside India and entities in Bangladesh or Pakistan are not permitted to purchase shares or debentures issued by Indian companies or any other Indian security without the prior approval of Reserve Bank, in terms of Regulation No.5.
- General permission has been granted in Regulation No. 6 to any person resident outside India to purchase shares/convertible debentures offered on right basis by an Indian company which satisfies the conditions stipulated in sub-regulation (2) of the said Regulation. The right shares so acquired shall be subject to same condition regarding repatriability as are applicable to original shares.
- General permission has been granted to the transferee company or a new company consequent on merger or de-merger or amalgamation of Indian companies subject to the conditions specified in Regulation No. 7.
- An Indian company has been permitted to issue shares to its employees or employees of its joint venture/subsidiary abroad, who are resident outside India either directly to such employees or through a trust subject to the provision of Regulation No. 8.
- General permission has been granted in terms of Regulation No. 9 for transfer of shares/convertible debentures by a person resident outside India as under:
- for transfer of shares/convertible debentures held by a person resident outside India other than NRI/OCB to any person resident outside India, provided that the transferee should have obtained permission of Central Government if he had any previous venture or tie-up in India through investment in any manner or a technica’ collaboration or trade mark agreement in the same field or allied field in which the Indian company whose shares are being transferred is engaged;
- NRIs/OCBs are permitted to transfer shares or convertible debentures of Indian company to another NRI/OCB;
- A person resident outside India is permitted to transfer shares/debentures of an Indian company to a resident by way of gift.
- Transfer of any security by a person resident in India to a person resident outside India would require approval of Reserve Bank.
- For transfer of existing shares/convertible debentures of an Indian company by a resident to a non-resident by way of sale, the transferor should obtain an approval of the Central Government and thereafter apply to Reserve Bank. In such cases the Reserve Bank may permit the transfer subject to such terms and conditions including the price at which sale may be made.
- Any other transfer not covered by the above referred provisions or the provisions of the Schedules would require the prior approval of Reserve Bank for which the application should be made on Form TSI. For arriving at the sale price of the shares in such cases the procedure indicated in Regulation 1OB.2 should be followed.
9. Reserve Bank has granted general permission for remittance of net sale proceeds (net of applicable taxes) of a security sold by a person resident outside India provided —
- the security is held on repatriation basis;
- security is sold on recognised stock exchange or the Reserve Bank’s permission for sale of security and remittance of sale proceeds has been obtained; and
- a NOC/Tax Clearance Certificate from Income-tax authorities or an undertaking/ declaration as per the provisions of paragraph 3B.1O of ECM has been produced.
10. The various schemes available to persons resident outside India for investment in Indian securities contained in the schedules are explained below in different paras.