Guide to .. Tax Management ,Tax Planning and Tax Saving
 

Investment In Shares, Securities, Units And Other Activities, etc. by an NRI in India

  1. The salient features of Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000

  2. Foreign Direct Investment Scheme

  3. Investment by Foreign Institutional Investors (FIIs) under Portfolio Investment Scheme

  4. Portfolio Investment Scheme for NRIs on Repatriationlnon-Repatriation Basis

  5. Purchaselsale of Shares and Convertible Debentures by NRIs on Non-Repatriation Basis

  6. Purchase and Sale of Other Securities

  7. Long-Term Capital Gains On Shares : Exemption under Section - 10 (36)

  8. Other Regulations :  under Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations

1. The salient features of Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000

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:

  1. 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.
  2. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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:
    1. 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;
    2. NRIs/OCBs are permitted to transfer shares or convertible debentures of Indian company to another NRI/OCB;
    3. A person resident outside India is permitted to transfer shares/debentures of an Indian company to a resident by way of gift.

    8.

    1. Transfer of any security by a person resident in India to a person resident outside India would require approval of Reserve Bank.
    2. 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.
    3. 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 —

      1. the security is held on repatriation basis;
      2. 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
      3. 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.

NRI Tax Planning & Tax Saving

2. Foreign Direct Investment Scheme

There are various schemes available under these Regulations for NRIs for investment in Indian securities. These are contained in various Schedules. Schedule No. I contains the Regulations regarding Foreign Direct Investment Scheme. The salient features of the Foreign Direct Investment Scheme as per the RB! Circular No.11 dated 16.5.2000, are given below:

SCHEDULE - I

Foreign Direct Investment Scheme

  1. Reserve Bank’s automatic route

An Indian company which is not engaged in the activity or manufacture of items listed in Annexure A ‘to this Schedule is permitted to issue shares to a person resident outside India upto the extent specified in Annexure B, on repatriation basis, provided—

    1. The issuer company does not require an industrial licence

    2. The shares are not being issued for acquiring existing shares of another Indian company;

    3. If the person resident outside India to whom the shares are being issued proposes to be a collaborator, he should have obtained Central Government’s approval if he had any previous investment collaboration/tie up in India in the same or allied field in which the Indian company issuing shares is engaged.

  1. Subject to compliance with the provisions of paragraph (I) above an Indian company which proposes to undertake activities in Annexure ‘B’ is permitted to issue shares/convertible debentures to persons resident outside India out of fresh capital issued for financing expansion programme for carrying on such activities.

  2. A trading company is permitted to issue shares/convertible debentures to the extent of 51 per cent of its capital to persons resident outside India. The remittance of dividend in respect of such shares would be permissible only when the company secures registration as an Export/Trading/Star Trading House.

  3. A SSI Unit which is not engaged in activity or manufacture of items included in Annexure ‘A’ to this Schedule may issue shares to non- residents upto 24 per cent of its capital. Such a company is permitted to issue shares beyond 24 per cent subject to ceilings specified in Annexure ‘B’ if (a) it gives up SSI status and (b) it is not engaged or does not propose to engage in manufacturing of items reserved for SSI sector.

  4. EOUs or units in Free Trade Zones or in Software/Electronic Hardware Technology Parks are permitted to issue shares to persons resident outside India beyond 24 per cent subject to compliance with ceilings indicated in Annexure ‘B’.

  5. Issue of shares by an Indian company to a person resident outside India which are not covered by the provisions of sub-paragraph (i) to (v) above would require approval of SIA or FIPB.

  6. An Indian company is permitted to issue fresh shares to the depository abroad for the purpose of raising resources through ADR or GDR mechanism subject to the conditions specified in paragraph No.4, 4A & 4B of the Schedule.

  7. The price of shares & ADRsI GDRs to be issued by the Indian company to persons resident outside India should be in accordance with the provisions of paragraph No. 5 and 5A of the Schedule as amended w.e.f. 18-6-2003.

  8. The remittance of dividend to the persons resident outside India by an Indian company which is engaged in any of the industries in the consumer sector specified in Annexure ‘E’ or any other activity to which dividend balancing requirement under the Industrial Policy notified by Government of India is applicable, would be subject to the provisions of paragraph No. 6 of the Schedule as amended w.e.f. 18-6-2003.

  9. The rate of dividend on preference shares issued by an Indian company to a person resident outside India should not exceed 300 basis points over State Bank of India’s prime lending rate, in terms of paragraph No. 7 of the Schedule.

  10. The consideration for issue of shares to persons resident outside India under this scheme should be received either by way of inward remittance through normal banking channels or out of funds held in NRE/FCNR accounts of NRI/OCB investor.

  11. The Indian company issuing shares to non-residents under this scheme should submit to Reserve Bank, reports as specified in paragraph 9 of the schedule.

  12. Reserve Bank’s permission is necessary for retention abroad of share subscription received by Indian company from non-residents.

  13. It may be noted that there are no separate schemes for NRIs/OCBs for direct investment in India on repatriation basis. NRIs/OCBs are now on par with any other foreign investor and they may invest in the shares/convertible debentures issued by an Indian company under the Foreign Direct Investment Scheme.

  14. Annexures A,B,C and D have been substituted w.e.f. 18-6-2003.

For further relaxation, please refer to the RBI.

3. Investment by Foreign Institutional Investors (FIIs) under Portfolio Investment Scheme

The earlier regulations and procedure for investment by FITs under Portfolio Investment Scheme mostly remain unchanged, and they are duly incorporated in Schedule 2 to these Regulations. It has also been made clear in this Schedule that the Reserve Bank would also consider applications from a domestic asset management company or a portfolio manager registered with SEBI as Fl! for managing the sub-account to make investment under the Portfolio Investment Scheme on behalf of persons resident outside India who are foreign citizens and body corporate registered outside India1 as indicated in paragraph 4 of Schedule 2. Such investment would be restricted to 5 per cent of the equity capital or 5 per cent of the paid up value of each series of convertible debentures within the overall ceiling of 24 per cent or 40 per cent as applicable for Fils for the purpose of Portfolio Investment Scheme. From 1-1-2004 on registered FIT has to maintain an account regarding purchase and sale of shares/convertible debentures.

4. Portfolio Investment Scheme for NRIs on Repatriationlnon-Repatriation Basis

Schedule 3 of these Regulations is of great practical utility to most of NRIs. There is no change in the earlier scheme for portfolio investment by NRIs on repatriation/non-repatriation basis except that the requirement of grant of approval by designated branch of an authorised dealer valid for a period of 5 years at a time has been dispensed with under the new Regulations as amended w.e.f. 3-10-2003.

5. Purchaselsale of Shares and Convertible Debentures by NRIs on Non-Repatriation Basis

Schedule 4 to these Regulations contains various Rules regarding the purchase/sale of shares and convertible debentures by NRIs on nonrepatriation basis. It may be noted here that there is no change in the earlier procedures/regulations for purchase and sale of shares/convertible debentures by NRIs on non-repatriation basis.

6. Purchase and Sale of Other Securities

Schedule 5 to these regulations contains rules regarding the purchase and sale of securities other than shares/debentures by a on-resident. There are no changes in the regulations or procedure applicable for purchase and sale of other securities by NRIs on repatriation/non- repatriation basis and by FITs on repatriation basis.

Scheduled 6, inserted w.e.f. 27-10-2003 is about investment in an Indian venture capital undertaking by a registered foreign venture capital investor.

7. Long-Term Capital Gains On Shares : Exemption under Section - 10 (36)

The Finance Act, 2003 provides that any long-term capital gain regarding eligible equity shares in a company and purchased on or after 1-3-2003 but before 1-3-2004 would be exempt from tax. Eligible equity share means (i) any equity share in a company being a constituent of BSE-500 Index of the Stock Exchange, Mumbai as on 1-3-2003 and such transaction of purchase and sale are entered into on a recognised stock exchange in India; and (ii) any equity share in a company allotted through a public issue on or after 1-3-2003 and listed in a recognised stock exchange in India before 1-3-2004 and such transaction is entered into on a recognised stock exchange in India.

8. Other Regulations :  under Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations

The Foreign Exchange Management (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2000 contains other matters like acquisition of right shares for which detailed provisions have been made in Regulation 6. Regulation 7 contains various matters regarding the issue and acquisition of shares after merger or de-merger or amalgamation of Indian companies. The Employees Stock Options Scheme is becoming popular now-a-days. Hence, Regulation 8 of these Regulations contains detailed rules regarding the issue of shares under the Employees’ Stock Options Scheme to persons resident outside India. As regards transfer of shares and convertible debentures of an Indian company by an NRI, detailed regulations are contained in Regulation No. 9. It has also been made clear that prior permission of the Reserve Bank is required in certain cases for transfer of securities by gift or sale, etc. as contained in Regulation No. 10. Regulation No. 11 of these Regulations makes it clear that no remittance of sale proceeds of an Indian security held by a person resident outside India would be made otherwise than in accordance with these Regulations and the conditions specified in the relevant Schedule. Hence, a reference to Schedules as discussed above becomes necessary for an NRI interested in the remittance of sale proceeds for which normally there is no problem in India. [For latest relaxations a reference to the Reserve Bank of India should be made}.

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