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INTRODUCTION
Prohibition on issue / transfer of foreign security:
- A person resident in India may issue or transfer any foreign security only in accordance with the Foreign Exchange Management Act, 1999, its rules, regulations or directions.
- The Reserve Bank may on an application made to it, permit any person resident in India to issue or transfer any foreign security.
Purchase and sale of foreign security by an Indian resident:
An Indian resident may purchase foreign security through one of the following ways:
by purchasing a foreign security out of funds held in Resident Foreign Currency (RFC) account;
by acquiring bonus shares on the foreign securities held in accordance with the Foreign Exchange Management Act, 1999, its rules and regulations;
by purchasing a foreign security from out of his foreign currency resources outside India, when not permanently resident in India.
An Indian resident may sell the foreign security purchased or acquired by him through any of the above methods.
DIRECT INVESTMENT OUTSIDE INDIA
Direct Investment in certain cases:
An Indian party may make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India subject to the following conditions:
- the total financial commitment of the Indian party does not exceed the ceiling as prescribed by the Reserve Bank;
- the direct investment is made in an overseas Joint Venture or Wholly Owned Subsidiary engaged in a bonafide business activity;
- the Indian Party is not on the Reserve Bank's Exporters caution list / list of defaulters to the banking system or under investigation by any investigation / enforcement agency or regulatory body;
- the Indian party has submitted up to date returns in respect of all its overseas investments;
- the Indian Party routes all transactions relating to the investment through only one branch of an authorized dealer.
Permissible Sources for funding direct investment:
Funding for direct investment outside India can be made by one or more of the following sources:
- the balances held in Exchange Earner's Foreign Currency Account of the Indian Party maintained with an authorized dealer;
- cash remittance by market purchase of foreign exchange;
- capitalization of export proceeds and other dues and entitlements;
- guarantees issued by the Indian party to or on behalf of the Joint Venture company or Wholly Owned Subsidiary;
- utilization of the amount raised by issue of ADRs / GDRs by the Indian party;
- proceeds of External Commercial Borrowing.
Investment in Agricultural Operations Overseas:
A person resident in India being a company incorporated in India or a partnership firm registered under Indian Partnership Act, 1932, may invest in agricultural operations including purchase of land, either directly or through their overseas offices. The following conditions must also be satisfied:
- the Indian party must be eligible to make such investment;
- the investment must be within the prescribed limits;
- the valuation of the acquired land must be certified by a certified valuer registered with the appropriate valuation authority in the host country.
Investment in Equity of a Company Registered Overseas:
A person resident in India, being an individual or a listed Indian company may invest in any of the following, subject to compliance with the prescribed investment ceilings:
- the shares of an overseas company which is listed on a recognized stock exchange;
- the rated bonds / fixed income securities issued by companies at a recognized stock exchange.
Investment by Mutual Funds:
Mutual funds registered with the Securities Exchange Board of India may invest in any of the following, subject to compliance with the specified limits:
- shares or rated bonds / fixed income securities of an overseas company listed on a recognized stock exchange;
- Exchange Traded Funds;
- other securities as stipulated by the Reserve Bank from time to time.
Investment in Financial Services Sector:
An Indian party may make investment in the financial services sector outside India, provided that the Indian party fulfills the following conditions:
- It has earned net profit during the preceding 3 financial years from the financial services activities;
- It is registered with the regulatory authority in India for conducting the financial services activities;
- It has obtained approval from the concerned regulatory authorities both in India and abroad for venturing into such financial sector activity;
- It has fulfilled the norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.
Investment by swap or exchange of shares of an Indian company:
An Indian Party may acquire shares of a foreign company engaged in bonafide business activity in exchange of ADRs / GDRs issued to it under the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued under it by the Central Government. The following conditions must also be satisfied:
- ADRs / GDRs are listed on any stock exchange outside India;
- the ADR / GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian Party;
- the total holding in the Indian Party by persons resident outside India after the new ADR / GDR issue must not exceed the sectoral cap prescribed under the relevant regulations for such investment;
- the valuation of the shares of the foreign company is made as per the recommendations of the Investment Banker if the shares are not listed on any stock exchange / on the current market capitalization of the foreign company.
Approval of the Reserve Bank in certain cases:
An Indian Party which does not satisfy the eligibility norms under the above mentioned paragraphs may apply to the Reserve Bank for approval. The Reserve Bank may take into account the following factors while considering any such application:
- Prima facie viability of the Joint Venture / Wholly Owned Subsidiary outside India;
- Contribution to external trade and other benefits which will accrue to India through such investment;
- Financial position and business track record of the Indian Party and the foreign entity;
- Expertise and experience of the Indian Party in the same or related line of activity of the Joint Venture or Wholly Owned Subsidiary outside India.
Obligations of the Indian Party:
An Indian Party which has acquired foreign security is under the following obligations:
- to receive share certificates or any other document as an evidence of investment in the foreign entity to the Reserve Bank's satisfaction;
- to repatriate to India all dues receivable from the foreign entity;
- to submit to the Reserve Bank an Annual Performance Report and other reports or documents as may be stipulated by the Reserve Bank.
Transfer of Shares:
An Indian Party may transfer shares held in a Joint Venture or Wholly Owned Subsidiary outside India, subject to certain criteria laid down by the Reserve Bank, through one of the following methods:
- by way of sale of shares, not involving write-off of the investment made, subject to the Reserve Bank's prior approval;
- by way of sale of shares involving write-off, subject to the Reserve Bank's prior approval;
- by way of pledge of shares to an authorised dealer or a public financial institution in India.
INVESTMENTS ABROAD BY INDIVIDUALS IN INDIA
Investment by a Proprietary Concern in India:
- A proprietary concern, subject to certain conditions, may accept shares of a company outside India instead of fees due to it for professional services rendered to the said company.
- Such proprietary concern must apply to the Reserve Bank and seek its prior permission for making direct investment abroad.
Investment by Individuals:
A resident individual must apply to the Reserve Bank for permission to acquire shares in a foreign entity offered as consideration for professional services rendered to the foreign entity.
The Reserve Bank may grant permission after taking into account the following factors:
- credentials and net worth of the individual and the nature of his profession;
- the extent of his forex earnings / balances in his EEFC and / or RFC account;
- financial and business track record of the foreign entity;
- potential for forex inflow to the country;
- other likely benefits to the country.
INVESTMENTS IN FOREIGN SECURITIES OTHER THAN BY WAY OF DIRECT INVESTMENT
Purchase / acquisition of foreign securities in certain cases:
A person resident in India being an individual may acquire foreign securities through one of the following ways:
- by way of gift from a person resident outside India;
- under Cashless Employees Stock Option Scheme issued by a company incorporated outside India, provided it does not involve any remittance from India;
- by way of inheritance from a person whether resident in or outside India;
- by purchasing the equity shares offered by a foreign company if he is an employee or a director of an Indian office or branch of a foreign company or of a subsidiary in India of a foreign company or of an Indian company in which the foreign equity holding meets the prescribed limit.
Transfer of a foreign security by a person resident in India
A person resident in India who has acquired or holds foreign securities in accordance with the provisions of the Foreign Exchange Management Act, 1999 or its Rules or Regulations, may transfer them by way of pledge for obtaining fund or non-fund based facilities in India from an authorized dealer.
Acquisition of foreign securities as qualification / rights shares
An Indian resident may acquire foreign securities, if it represents:
- qualification shares issued by a company incorporated outside India for holding the post of a director in the company, subject to certain conditions;
- rights shares in a company incorporated outside India;
- purchase of shares of a Joint Venture or Wholly Owned Subsidiary outside India of the Indian promoter company by the employees / directors of an Indian promoter company engaged in the field of software;
- purchase of foreign securities under ADR / GDR linked stock option schemes by resident employees (including working directors) of an Indian company in the knowledge based sector.
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