Master Circular on Foreign Investment in India (2007)

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The regulatory framework and instructions issued by the Reserve Bank of India have been compiled in this Master Circular. In addition to the above, this Master Circular also covers the following areas. (i) Acquisition of immovable property which is regulated in terms of Section 6(3) (i) of Foreign Exchange Management Act, 1999 read with Notification No. FEMA 21/ 2000-RB dated May 3, 2000; (ii) Establishment or Branch/Liaison Office in India, which is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999 read with Notification No. FEMA 22/ 2000-RB dated May 3, 2000; (iii) Investment in capital of partnership firms or proprietary concern which is regulated i n terms of Section 2(h) of Section 47 of Foreign Exchange Management Act, 1999, read with Notification No. FEMA 24/2000-RB dated May 3, 2000. 2. This Master Circular consolidates the existing instructions issued by the Reserve Bank of India through AP (DIR Series) Circulars and Notifications under FEMA, in respect of the above areas. The list of underlying circulars/notifications is furnished in Appendix. 3. This Master Circular is being issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2008 and be replaced by an updated Master Circular on the subject on that date. Yours faithfully, (Salim Gangadharan) Chief General Manager INDEX Part – I Foreign Investments in India—schematic representation: Foreign Investment in India Entry routes for investments in India Prohibition on investment in India Eligibility for Investing in India Type of instruments Investments in Small Scale Industrial units Investments in EOUs/FTZs/ EPZs/HTPs and STPs Reporting of FDI Issue Price Foreign Currency Account Transfer of Shares and convertible debentures Conversion of ECB / Lumpsum Fee/Royalty into Equity Remittance of sale proceeds Issue of shares by Indian companies under ADR / GDR Two-way Fungibility Scheme Sponsored ADR/GDR issue Portfolio Investment Scheme Investments by Overseas Corporate Bodies (OCBs) Investments by Venture Capital Funds Purchase of other securities by NRIs Purchase of other securities by FIIs Investment by MDBs Part II Acquisition and Transfer of Immovable Property in India Acquisition and Transfer of Immovable Property in India Purchase / Sale of Immovable Property by Foreign Embassies / Diplomats/Consulate General Acquisition of Immovable Property for carrying on a permitted activity Repatriation of sale proceeds Prior permission for acquisition or transfer of immovable property in India by citizens of certain countries Part III Application to RBI Liaison Offices Liaison Office of foreign Insurance Companies Branch Offices Branch Office in SEZs Branches of Banks Project Offices General conditions Closure of Offices Part IV Investments with repatriation benefits Investment by non-residents other than NRIs / PIO Restrictions Annex-1 Annex-2 Annex-3 Annex-4 Annex-5 Annex-6 Annex-7 Annex-8 Annex-9 APPENDIX Part – I Foreign Investments in India—schematic representation: Section-I: Foreign Direct Investments Foreign Investment in India Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. Reserve Bank of India has issued Notification No. FEMA 20/2000-RB dated May 3, 2000 which contains the Regulations in this regard. This notification has been amended from time to time. Entry routes for investments in India Foreign investment is freely permitted in almost all sectors. Foreign Direct Investments (FDI) can be made under two routes—Automatic Route and Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from RBI or Government of India for the investment. Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required. Entry route for foreign investors as well as sector-specific investment limits in India are given in Annex-2. FDI Policy is formulated by the Government of India. The policy and procedures in respect of FDI in India is available in 'the Manual on Investing in India- Foreign Direct Investment, Policy & Procedures' . This document is available in public domain and can be downloaded from the website of Ministry of Commerce and Industry, Department of Industrial Policy and Promotion— www.dipp.nic.in. FEMA Regulations prescribe the mode of investments i.e. manner of receipt of funds, issue of shares/convertible debentures and preference shares and reporting of the investments to RBI. Prohibition on investment in India Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as Trusts) which is engaged or proposes to engage in the following activities: (i) Business of chit fund, or (ii) Nidhi Company , or (iii) Agricultural or plantation activities or (iv) Real estate business, or construction of farm houses (v) Trading in Transferable Development Rights (TDRs). It is clarified that Real Estate Business does not include development of townships, construction of residential/commercial premises, roads or bridges. It is further clarified that partnership firms/proprietorship concerns having investments as per FEMA regulations are not allowed to engage in Print Media sector. In addition to the above, investment in the form of FDI is also prohibited in certain sectors such as: (i) Retail Trading (ii) Atomic Energy (iii) Lottery Business (iv) Gambling and Betting (v) Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations) Eligibility for Invsting in India A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India, (other than an entity incorporated in Pakistan or Bangladesh) can invest in India, subject to the FDI Policy of the Government of India. Erstwhile OCBs, who have converted themselves into companies incorporated outside India can make fresh investments in India under the FDI Scheme provided they are not under the adverse notice of RBI / SEBI. Type of instruments Indian companies can freely issue equity shares / convertible debentures and preference shares subject to valuation norms prescribed under FEMA Regulations. Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible are considered as debt. As such, the guidelines applicable for External Commercial Borrowing (ECB), viz. eligible borrowers, recognised lenders, amount and maturity, end use stipulations, etc. will apply to such issues. Since these instruments are denominated in rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread permissible for ECBs of corresponding maturity. As far as Debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy. Investments in Small Scale Industrial units A foreign investor can invest in an Indian company which is a small scale industrial unit provided it is not engaged in any activity which is prohibited under the FDI policy. Such investments are subject to a limit of 24% of paid-up capital of the Indian company/SSI Unit. An SSI Unit can issue equity shares / fully convertible preference shares / fully convertible debentures more than 24% of its paid-up capital if: (a) It has given up its small scale status, (b) It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and (c) It complies with the sectoral caps specified in Annex-2. It is clarified that the company/SSI Unit would be reckoned as having given up its SSI status, if the investment in plant and machinery exceeds the limits prescribed under the Micro, Small and Medium Enterprises Development Act, 2006. Investments in EOUs/FTZs/ EPZs/HTPs and STPs An SSI Unit, which is an Export Oriented Unit or a unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park, issue of shares / convertible debentures / preference shares exceeding 24% of the paid-up capital upto the sectoral caps specified in Annex-2. Investments in Asset Reconstruction Companies (ARCs) Persons resident outside India (other than Foreign Institutional Investors (FIIs)), can invest in the equity capital of Asset Reconstruction Companies (ARCs) registered with RBI under the Government Route. Automatic Route is not available for such investments . Such investments have to be strictly in the nature of FDI and investments by FIIs are not permitted . FDI is restricted to 49% of the paid up capital of the ARC. However, FIIs registered with SEBI can invest in the Security Receipts (SRs) issued by ARCs registered with RBI. FIIs can invest upto 49% of each tranche of scheme of SRs subject to the condition that investment by a single FII in each tranche of scheme of SRs shall not exceed 10% of the issue. Investment in infrastructure companies in the Securities Market Foreign investment is permitted in Infrastructure Companies in Securities Markets, namely stock exchanges, depositories and clearing corporations , in compliance with SEBI Regulations and subject to the following conditions : i) Foreign investment upto 49% of the paid up capital, is allowed in these companies with a separate Foreign Direct Investment (FDI) cap of 26% and Foreign Institutional Investment (FII) cap of 23%; ii) FDI will be allowed with specific prior approval of FIPB ; and iii) FIIs can invest only through purchases in the secondary market. Investments from Nepal & Bhutan NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/ FCNR (B) accounts of the NRIs. Issue of Rights / Bonus shares FEMA provisions allow Indian companies to freely issue Right / Bonus shares to existing non-resident share-holders, subject to adherence to sectoral cap, if any. However, such issue of bonus/rights shares have to be in accordance with other laws/statutes like the Companies Act, 1956, SEBI (Disclosure and Investor Protection) Guidelines (in case of listed companies) etc. The price of shares offered on right basis by the Indian company to non-resident shareholders shall not be lower than the price at which such shares are offered to resident shareholders. Rights issue to erstwhile OCBs: As such, entitlement of rights shares is not automatically available to Overseas Corporate Bodies (OCBs). OCBs have been de-recognised as a class of investors with effect from September 16, 2003. Therefore, Companies desiring to issue rights shares to such erstwhile OCBs will have to take specific prior permission from RBI. However, bonus shares can be issued to erstwhile OCBs. Renunciation of rights by residents to non-residents: Existing non-resident shareholders are allowed to apply for issue of additional shares / convertible debentures / preference shares over and above their rights entitlements. The investee company can allot the additional rights shares out of un-subscribed shares, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap. Acquisition of shares under Scheme of Amalgamation / merger Mergers and amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/amalgamation. Once the scheme of merger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India subject to the condition that: (i) The percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap. (ii) The transferor company or the transferee or new company is not engaged in activities which are prohibited in terms of FDI policy. Issue of shares under Employees Stock Option Scheme Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad, other than citizens of Pakistan. Shares under ESOPs can be issued directly or through a Trust subject to the condition that: (i) The scheme has been drawn in terms of relevant regulations issued by the Securities and Exchange Board of India; and (ii) The face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5 per cent of the paid-up capital of the issuing company. If the company is not listed, it has to follow the provisions of the Companies Act, 1956. The Indian company can issue ESOPs to employees who are resident outside India, other than citizens of Pakistan and Bangladesh . The issuing company is required to report the details of such issues to the concerned Regional Office of the Reserve Bank, within 30 days from the date of issue of shares under ESOPs. Reporting of FDI Reporting of inflow: An Indian company receiving investment from outside India for issuing shares / convertible debentures / preference shares under the FDI Scheme, should report the details of the inflow to the Reserve Bank not later than 30 days from the date of receipt. Details to be reported are: (i) Name and address of the foreign investor/s (ii) Date of receipt of funds in foreign currency and its rupee equivalent (iii) Name and address of the Authorised Dealer through whom the funds have been received, and (iv) Details of Government approval for the investment, if any.   Reporting of issue of shares After issue of shares/convertible debentures/preference shares, the Indian company has to file Form FC-GPR enclosed in Annex-6, not later than 30 days from the date of issue. The form can be downloaded from the RBI website http://www.rbi.org.in/Scripts/BS_ViewFemaForms.aspx. Part A of Form FC-GPR has to be duly filled up and signed by the Authorised Signatory and submitted to the Authorised Dealer of the company, who will forward it to the Reserve Bank. While forwarding the Form, the Authorised Dealer will enclose a KYC Report on the foreign investor. Along with Part A of FC-GPR, the following documents has to be attached by the company: (i) A certificate from the Company Secretary of the company certifying that (a) all the requirements of the Companies Act, 1956 have been complied with; (b) terms and conditions of the Government approval, if any, have been complied with; (c) the company is eligible to issue shares under these Regulations; and (d) the company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration; (ii) A certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India. Both the above reports have to be submitted to the concerned Regional Office of RBI under whose jurisdiction the registered office of the company is situated. Part-B of FC-GPR should be filed on an annual basis with the Reserve Bank. This filing has to be done in the month of June every year, for all outstanding investment by way of FDI as well as Portfolio / other investments and by way of re-invested earnings for the previous April to March period. [For example, all Indian companies who have received FDI, Portfolio investments, other investments (such as bonds, debentures etc.) from foreign investors during the period April 2006 to March 2007, have to report in Part B of Form FC-GPR in the month of June 2007, along with their retained earnings during the period.] The above mentioned three stage reporting mechanism has to be followed wherever there is inflow of funds through normal banking channels or debit to NRE/FCNR account for investment purposes. Moreover, issue of bonus/rights shares or stock options to persons resident outside India directly or on amalgamation / merger with an existing Indian company, as well as issue of shares on conversion of ECB/royalty/lumpsum technical know-how fee has to be reported in Form FC-GPR. Issue Price Price of shares issued to persons resident outside India under the FDI Scheme, shall be worked out on the basis of SEBI guidelines in case of listed companies. In case of unlisted companies, valuation of shares has to be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues. Foreign Currency Account Indian companies which are eligible to issue shares to persons resident outside India under the FDI Scheme will be allowed to retain the share subscription amount in a foreign currency account, with the prior approval of RBI. Transfer of Shares and convertible debentures Foreign investors can also invest in Indian companies by purchasing/ acquiring existing shares from Indian shareholders or from other non-resident shareholders. General permission has been granted to non-residents / NRIs for acquisition of shares by way of transfer subject to the following:- A person resident outside India (Other than NRI and OCB) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India (including NRIs). NRIs and erstwhile OCBs may transfer by way of sale or gift the shares or convertible debentures held by him or it to another NRI. In both the above cases, if the transferee has previous venture or tie-up in India through investment/technical collaboration/trade mark agreement in the same field in which the Indian company, whose shares are being transferred, is engaged, he has to obtain prior permission of SIA/FIPB to acquire the shares. This restriction is, however, not applicable to the transfer of shares to International Financial Institutions (i.e. ADB, IFC, CDC, DEG) and transfer of shares to Indian company engaged in Information Technology Sector . A person resident outside India can transfer any security to a person resident in India by way of gift . A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a registered broker.   A person resident in India can transfer by way of sale, shares / convertible debentures (including transfer of subscriber's shares), of an Indian company in sectors other than financial service sector (i.e. Banks, NBFC, Insurance, ARCs and infrastructure providers in the securities market such as Stock Exchanges, Clearing Corporations etc.) under private arrangement to a person resident outside India, subject to the guidelines given in Annex 3. General permission is also available for transfer of shares / convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to the guidelines given in Annex 3. The above General Permission also covers transfer by a resident to a non-resident of shares / convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route of RBI, as well as transfer of shares by a non-resident to an Indian company under buy-back and / or capital reduction scheme of the company. However, this General Permission is not available for transfer of shares / debentures of an entity engaged in any activity in the financial service sector (i.e. Banks, NBFCs, ARCs and Insurance), Reporting of transfer of shares between residents and non-residents and vice versa is to be done in Form FC-TRS (enclosed in Annex-7). This Form needs to be submitted to the AD Bank, which will forward the same to its link office. The link office will consolidate the form and submit a report to RBI. AD Category – I banks have been given general permission to open Escrow account and Special account by non-resident corporates for open offers/ exit offers and delisting of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI Regulations / provisions of the Companies Act, 1956 will be applicable. Prior permission of RBI in certain cases for transfer of shares/ convertible debentures A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from Reserve Bank. Reserve Bank considers the following factors while processing such applications: The transferee (donee) is eligible to hold such security under Schedule 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time. The gift does not exceed 5 per cent of the paid-up capital of the Indian company / each series of debentures/each mutual fund scheme. The applicable sectoral cap / foreign direct investment (FDI) limit in the Indian company is not breached. The transferor (donor) and the transferee (donee) are close relatives as defined in section 6 of the Companies Act, 1956, as mended from time to time. The current list is reproduced in Annex 5. The value of security to be transferred together with any security already transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 25,000 during a calendar year . Such other conditions as stipulated by Reserve Bank in public interest from time to time. The following instances of transfer of shares from residents to non-residents by way of sale requires RBI approval: Transfer of shares or convertible debentures of an Indian company engaged in financial sector (i.e. Banks, NBFCs, Asset Reconstruction Companies and Insurance), Transactions which attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The following instances of transfer of shares from residents to non-residents by way of sale or otherwise requires Government approval followed by permission from RBI: Transfer of shares of companies engaged in sectors falling under the Government Approval Route, Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable. Conversion of ECB / Lumpsum Fee/Royalty into Equity Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) into shares/ preference shares, subject to the following conditions and reporting requirements. The activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company, The foreign equity after conversion of ECB into equity is within the sectoral cap, if any, Pricing of shares is as per SEBI regulations /erstwhile CCI guidelines/ in the case of listed/unlisted companies as the case may be. Compliance with the requirements prescribed under any other statute and regulation in force. The conversion facility is available for ECBs availed under the Automatic or Approval Route. This would also be applicable to ECBs irrespective of whether due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators. General permission is also available for issue of shares/preference shares against lump-sum technical know-how fee, royalty, under automatic route or SIA / FIPB route, subject to pricing guidelines of SEBI/CCI and compliance with applicable tax laws. Reporting Requirements Units in Special Economic Zones (SEZs) are permitted to issue equity shares to non-residents against import of capital goods subject to the following :- The valuation should be verified by a Committee consisting of Development Commissioner and the appropriate Customs officials. The SEZ unit issuing equity in the above manner should report the particulars of the shares issued in the Form FC-GPR. Details of issue of shares against conversion of ECB has to be reported to the concerned Regional Office of the Reserve Bank, as indicated below: In case of full conversion of ECB into equity, the company shall report the conversion in form FC-GPR to the concerned Regional Office of the Reserve Bank as well as in form ECB-2 submitted to the Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051, within seven working days from the close of month to which it relates. The words 'ECB wholly converted to equity' shall be clearly indicated on top of the ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary. In case of partial conversion of ECB, the company shall report the converted portion in form FC-GPR to the concerned Regional Office as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words 'ECB partially converted to equity' shall be indicated on top of the ECB-2 form. In the subsequent months, the outstanding portion of ECB shall be reported in ECB-2 form to DESACS.   Remittance of sale proceeds An authorised dealer bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate has been produced. Issue of shares by Indian companies under ADR / GDR Depositary Receipts (DRs) are negotiable securities issued outside India by a Depository Bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian Bank in India. DRs are traded in Stock Exchanges in the US, Singapore, Luxembourg etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs). In the Indian context, DRs are treated as FDI. Indian companies can raise foreign currency resources abroad through the issue of ADRs/GDRs, in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time. The company can issue ADRs/GDRs if it is eligible to issue shares to persons resident outside India under the FDI Scheme. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs. Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market would require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier. ADRs/GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilisation of the proceeds, the Indian company can invest the funds in - Deposits with or Certificate of Deposit or other instruments offered by banks who have been rated by Standard and Poor, Fitch, IBCA or Moody's etc. and such rating not being less than the rating stipulated by Reserve Bank from time to time for the purpose, Deposits with branch outside India of an authorised dealer in India, and Treasury bills and other monetary instruments with a maturity or unexpired maturity of the instrument of one year or less. There are no end use restrictions except for a ban on deployment / investment of such funds in Real Estate or the Stock Market. There is no monetary limit upto which an Indian company can raise ADRs / GDRs. Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions. RBI regulations regarding voting rights in the case of banking companies will continue to be applicable to all shareholders exercising voting rights. Erstwhile OCBs who are not eligible to invest in India through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies. The pricing of ADR / GDR issues should be made at a price not less than the higher of the following two averages:  (i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. The "relevant date" means the date thirty days prior to the date on which the meeting of the general body of shareholders is held, in terms of section 81 (IA) of the Companies Act, 1956, to consider the proposed issue. The ADR / GDR proceeds can be utilised for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance. Two-way Fungibility Scheme A limited Two-way Fungibility scheme has been put in place by the Government of India for ADRs / GDRs. Under this scheme, a stock broker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors. Re-issuance of ADRs /GDRs would be permitted to the extent of ADRs / GDRs which have been redeemed into underlying shares and sold in the Indian market. Sponsored ADR/GDR issue An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADR / GDR. Reporting of ADR/GDR Issues The Indian company issuing ADRs / GDRs has to furnish to the Reserve Bank, full details of such issue in the form enclosed in Annex-8, within 30 days from the date of closing of the issue. The company should also furnish a quarterly return in the form enclosed in Annex-9, to Reserve Bank within 15 days of the close of the calendar quarter. Section-II: Foreign Portfolio Investments Portfolio Investment Scheme Foreign Institutional Investors (FIIs) registered with SEBI and Non-resident Indians (NRIs) are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme (PIS). The FIIs who have been granted registration by SEBI should approach their designated Authorised Dealer bank (known as Custodian Bank), for opening a foreign currency account and/or a Non Resident Special Rupee Account. NRIs can approach the designated branch of any AD bank authorised by RBI to administer the Portfolio Investment Scheme for permission to open a NRE/NRO account under the Scheme for routing investments. Investment by FIIs under PIS Shareholding Prohibition on investments Exchange Traded Derivative Contracts Forward cover & cancellation and rebooking Margin requirements Accounts with ADs   Reserve Bank has given general permission to SEBI registered FIIs/sub-accounts to invest under the PIS. Total holding of each FII/sub account under this Scheme shall not exceed 10% of the total paid up capital or 10% of the paid up value of each series of convertible debentures issued by the Indian company. Total holdings of all FIIs/sub-accounts put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures. This limit of 24% can be increased to the sectoral cap / statutory limit as applicable to the Indian company concerned, by passing a resolution of its Board of Directors followed by a special resolution to that effect by its General Body. A domestic asset management company or portfolio manager, who is registered with SEBI as an FII for managing the fund of a sub-account can make investments under the Scheme on behalf of (i) a person resident outside India who is a citizen of a foreign state, or (ii) a body corporate registered outside India; Provided such investment is made out of funds raised or collected or brought from outside through normal banking channel. Investments by such entities shall not exceed 5% of the total paid-up equity capital or 5% of the paid-up value of each series of convertible debentures issued by an Indian company, and shall also not exceed the overall ceiling specified for FIIs. FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: i) Business of chit fund, or ii) Nidhi Company , or iii) Agricultural or plantation activities or iv) Real estate business, or construction of farm houses v) Trading in Transferable Development Rights (TDRs). 'Real Estate Business' mentioned above, does not include development of townships, construction of residential/commercial premises, roads or bridges. SEBI registered FIIs are allowed to trade in all exchange traded derivative contracts on recognised Stock Exchanges in India subject to the position limits as prescribed by SEBI from time to time. The SEBI registered FII/sub-account may open a separate account under their Special Non-Resident Rupee Account through which all receipts and payments pertaining to trading/investment in exchange traded derivative contracts will be made ( including initial margin and mark to market settlement, transaction charges, brokerage etc .). Further, transfer between the Special Non-Resident Rupee Account and the separate account maintained for the purpose of trading in exchange traded derivative contracts can be freely made. However, repatriation of the rupee amount will be made only through their Special Non-Resident Rupee Account subject to payment of relevant taxes. The Authorised Dealer banks have to keep proper records of the above mentioned separate account and submit them to Reserve Bank as and when required. FIIs are allowed to offer foreign sovereign securities with AAA rating as collateral to the recognised Stock Exchanges in India for their transactions in derivatives segment subject to SEBI guidelines. In order to accept the securities as collateral, recognised Stock Exchanges have to take RBI approval under FEMA. AD banks can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments. Rebooking of cancelled forward contracts is allowed up to a limit of 2% of the market value of the entire investment of FIIs in equity and / or debt in India. The limit for calculating the eligibility for rebooking will be based upon market value of the portfolio as at the beginning of the financial year (April – March). The outstanding contracts have to be duly supported by underlying exposure at all times. The AD Category - I bank has to ensure that (i) total forward contracts outstanding does not exceed the market value of portfolio and, (ii) forward contracts permitted to be rebooked does not exceed 2% of the market value as determined at the beginning of the financial year. The monitoring of forward cover is to be done on a fortnightly basis. SEBI registered FIIs / sub-accounts are allowed to keep with the Trading Member / Clearing Member amount sufficient to cover the margins prescribed by the Exchange / Clearing House and such amounts as may be considered necessary to meet the immediate needs. FIIs/sub-accounts can open a Foreign Currency denominated Account and / or a Special Non-Resident Rupee Account for the purpose. They can transfer sums from the foreign currency account to the rupee account for making genuine investments in securities in terms of the SEBI (FII) Regulations, 1995. The sums may be transferred from foreign currency account to rupee account at the prevailing market rate and the Authorised Dealer bank may transfer repatriable proceeds (after payment of tax) from the rupee account to the foreign currency account. The Special Non-Resident Rupee Account may be credited with the proceeds of sale of shares / debentures, dated Government securities, Treasury Bills etc., dividend, income received by way of interest, forward contracts booked etc., by compensation received towards sale / renouncement of right offerings of shares and income earned on securities lent under SEBI’s Securities Lending Scheme, 1997 after deduction of appropriate tax, if any. Such credits are allowed, subject to the condition that the Authorized Dealer bank should obtain confirmation from the investee company / FII concerned that tax at source, wherever necessary, has been deducted from the gross amount of dividend / interest payable / approved income to the share / debenture / Government securities holder at the applicable rate, in accordance with the Income Tax Act. The Special Non-Resident Rupee Account may be debited for purchase of shares / debentures, dated Government securities, Treasury Bills etc., and for payment of fees to applicant FIIs’ local Chartered Accountant / Tax Consultant where such fees constitute an integral part of their investment process. Private placement with FIIs SEBI registered FIIs have been permitted to purchase shares / convertible debentures of an Indian company through offer/private placement, subject to the ceilings prescribed above, i.e. individual FII/sub account—10% and all FIIs/sub-accounts put together—24% of the paid-up capital of the Indian company. Indian company is permitted to issue such shares provided that: (i) in the case of public offer, the price of shares to be issued is not less than the price at which shares are issued to residents and (ii) in the case of issue by private placement, the price is not less than the price arrived at in terms of SEBI guidelines or guidelines issued by the erstwhile Controller of Capital Issues, as applicable. Purchases can also be made of PCDs / FCDs/ Right Renunciations / Warrants / Units of Domestic Mutual Fund Schemes. Allocation of funds The SEBI registered FII shall restrict allocation of its total investment between equities and debt in the Indian capital market in the ratio of 70:30. The FII may form a 100% debt fund and get such fund registered with SEBI. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard. Reporting of FII investments   An FII may invest in a particular share issue of an Indian company either under the FDI Scheme or the Portfolio Investment Scheme. The AD banks have to ensure that the FIIs who are purchasing the shares by debit to the special rupee accounts report these details separately in the LEC (FII) returns. The Indian company which has issued shares to FIIs under the FDI Scheme (for which the payment has been received directly into company’s account) and the Portfolio Investment Scheme (for which the payment has been received from FIIs' account maintained with an Authorised Dealer bank in India) should report these figures separately under item no. 5 of Form FC-GPR (Post issue pattern of shareholding) so that the details could be suitably reconciled for statistical / monitoring purposes. A daily statement in respect of all transactions (except derivative trade) have to be submitted by the custodian bank in floppy / soft copy in the prescribed format directly to Reserve Bank to monitor the overall ceiling / sectoral cap / statutory ceiling. Investments by Non Resident Indians (NRIs) NRIs are allowed to invest in shares of listed Indian companies in recognised Stock Exchanges under the PIS. NRIs can invest on repatriation and non-repatriation basis under PIS route upto 5% of the paid up capital / paid up value of each series of debentures of listed Indian companies. The aggregate paid-up value of shares / convertible debentures purchased by all NRIs cannot exceed 10% of the paid-up capital of the company / paid-up value of each series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company passes a special resolution to that effect. The NRI investor has to take delivery of the shares purchased and give delivery of shares sold. Payment for purchase of shares and/or debentures on repatriation basis has to be made by way of inward remittance of foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India. If the shares are purchased on non-repatriation basis, the NRIs can also utilise their funds in NRO account in addition to the above. The link office of the designated branch of an AD bank shall furnish to the Reserve Bank, a report on a daily basis on PIS transactions undertaken by it, such report can be furnished on-line or on a floppy to RBI.   Shares purchased by NRIs on the stock exchange under PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of RBI. NRIs are allowed to invest in Exchange Trade Derivative Contracts approved by SEBI from time to time out of Rupee funds held in India on non-repatriation basis subject to the limits prescribed by SEBI. Monitoring by RBI Caution List Ban List   When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit, which is 2% below the applicable limit, Reserve Bank will issue a notice to all designated branches of Authorised Dealer banks stating that any further purchases of shares of the particular Indian company will require prior approval of Reserve Bank. RBI gives case-by-case approvals to FIIs for purchase of shares of companies included in the Caution List. This is done on first-come-first-served basis. Once the shareholding by FIIs/NRIs reach the overall ceiling / sectoral cap / statutory limit, Reserve Bank puts the company on the Ban List. Once a company is placed on the Ban List, no FII or NRI can purchase the shares of the company under the Portfolio Investment Scheme. Investments by Overseas Corporate Bodies (OCBs) With effect from November 29, 2001, OCBs are not permitted to invest under the PIS in India. Further, the OCBs which have already made investments under the Portfolio Investment Scheme are allowed to continue holding such shares / convertible debentures till such time these are sold on the stock exchange. OCBs have been de-recognised as a class of investors in India with effect from September 16, 2003. Section-III: Foreign Venture Capital Investments Investments by Venture Capital Funds A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a Scheme floated by such IVCFs subject to the condition that the VCF should also be registered with SEBI. An IVCU is defined as a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity under the negative list specified by SEBI. A VCF is defined as a fund established in the form of a trust, a company including a body corporate and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996 which has a dedicated pool of capital raised in a manner specified under the said Regulations and which invests in Venture Capital Undertakings in accordance with the said Regulations. FVCIs can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement in units of schemes / funds set up by a VCF. At the time of granting approval, RBI permits the FVCI to open a foreign currency account or rupee account with a designated branch of an AD bank. The purchase / sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller. Authorised Dealers can offer forward cover to FVCIs to the extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments has to be deducted from the eligible cover.   Section-IV: Other Foreign Investments Purchase of other securities by NRIs 1. On non-repatriation basis: NRIs can purchase shares/ convertible debentures issued by an Indian company on non-repatriation basis without any limit. Amount of consideration for such purchase shall be paid by inward remittance through normal banking channels from abroad or out of funds held in NRE / FCNR / NRO account maintained with the AD bank. NRI can also, without any limit, purchase on non-repatriation basis dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds. Government of India has notified that NRIs are not permitted to make Investments in Small Savings Schemes including PPF. In case of investment on non-repatriation basis, the sale proceeds shall be credited to NRO account. The amount invested under the scheme and the capital appreciation thereon will not be allowed to be repatriated abroad. 2. On repatriation basis: A Non-resident Indian can purchase on repatriation basis, without limit, Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds; bonds issued by a public sector undertaking (PSU) in India and shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids. Purchase of other securities by FIIs Foreign Institutional Investors can buy dated Government securities / treasury bills, listed non-convertible debentures /bonds issued by Indian companies and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognized stock exchange in India. These purchases are subject to limits notified by SEBI. Investment by MDBs A Multilateral Development Bank (MDB) which is specifically permitted by Government of India to float rupee bonds in India can purchase Government dated securities. Foreign Investment in Tier I and Tier II instruments issued by banks in India FIIs registered with SEBI and NRIs have been permitted to subscribe to the Perpetual Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital instruments (eligible for inclusion as upper Tier II capital), issued by banks in India, subject to the following conditions. a) Investment by all FIIs in Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 49 per cent of each issue, and investment by individual FII should not exceed the limit of 10 per cent of each issue. b) Investments by all NRIs in Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 24 per cent of each issue and investments by a single NRI should not exceed 5 percent of the issue. c) Investment by FIIs in Debt capital instruments (Tier II) shall be within the limits stipulated by SEBI for FII investment in corporate debt. d) Investment by NRIs in Debt Capital instruments (Tier II) shall be in accordance with the extant policy for investment by NRIs in other debt instruments. The issuing banks are required to ensure compliance with the conditions stipulated above at the time of issue. They are also required to comply with the guidelines notified by the Department of Banking Operations and Development (DBOD), Reserve Bank of India, from time to time. The issue-wise details of amount raised as Perpetual Debt Instruments qualifying for Tier I capital by the bank from FIIs / NRIs are required to be reported in the prescribed format within 30 days of the issue to the Reserve Bank. Investment by FIIs in Upper Tier II Instruments raised in Indian Rupees will be outside the limit prescribed by SEBI for investment in corporate debt instruments. However, investment by FIIs in these instruments will be subject to a separate ceiling of USD 500 million. The details of the secondary market sales / purchases by FIIs and the NRIs in these instruments on the floor of the stock exchange are to be reported by the custodians and designated banks respectively, to the Reserve Bank of India through the soft copy of the LEC Returns.   Part II Acquisition and Transfer of Immovable Property in India. Acquisition and Transfer of Immovable Property in India. A person resident outside India who is a citizen of India (NRI) can acquire by way of purchase, any immovable property in India other than agricultural land/plantation property / farm house. He can transfer any immovable property other than agricultural or plantation property or farm house to: a) A person resident outside India who is a citizen of India or b) A person of Indian origin resident outside India or c) A person resident in India. He may transfer agricultural land / plantation property / farm house acquired by way of inheritance, only to Indian citizens permanently residing in India. Payment for acquisition of property can be made out of: i) Funds received in India through normal banking channels by way of inward remittance from any place outside India or ii) Funds held in any non-resident account maintained in accordance with the provisions of the Foreign Exchange Management Act, 1999 and the regulations made by Reserve Bank of India from time to time. Such payment cannot be made either by traveller's cheque or by foreign currency notes or by other mode other than those specifically mentioned above.   A person resident outside India who is a person of Indian Origin (PIO) can acquire any immovable property in India other than agricultural land / farm house / plantation property :- i. By way of purchase out of funds received by way of inward remittance through normal banking channels or by debit to his NRE / FCNR(B) / NRO account. ii. By way of gift from a person resident in India or a NRI or a PIO. By way of inheritance from a person resident in India or a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force or FEMA regulations at the time of acquisition of the property.     A PIO may transfer any immoveable property other than agricultural land/Plantation property/farmhouse in India a) By way of sale to a person resident in India. b) By way of gift to a person resident in India or a Non resident Indian or a PIO. A PIO may transfer agricultural Land / Plantation property / farmhouse in India by way of sale or gift to person resident in India who is a citizen of India. Purchase / Sale of Immovable Property by Foreign Embassies / Diplomats / Consulate General Foreign Embassy / Consulate as well as Diplomatic personnel in India are allowed to purchase/ sell immovable property in India other than agricultural land/ plantation property / farm house provided (i) clearance from Government of India, Ministry of External Affairs is obtained for such purchase / sale, and (ii) the consideration for acquisition of immovable property in India is paid out of funds remitted from abroad through banking channel. Acquisition of Immovable Property for carrying on a permitted activity A branch, office or other place of business, (excluding a liaison office) in India of a foreign company established with requisite approvals wherever necessary, is eligible to acquire immovable property in India which is necessary for or incidental to carrying on such activity provided that all applicable laws, rules, regulations or directions in force are duly complied with. The entity / concerned person is required to file a declaration in the form IPI with the Reserve Bank, within ninety days from the date of such acquisition. The non-resident is eligible to transfer by way of mortgage the said immovable property to an AD bank as a security for any borrowing. Repatriation of sale proceeds In the event of sale of immovable property other than agricultural land / farm house / plantation property in India by NRI / PIO, the authorised dealer will allow repatriation of sale proceeds outside India provided; i) the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of FEMA Regulations; ii) the amount to be repatriated does not exceed (a) the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident Account or (b) the foreign currency equivalent as on the date of payment, of the amount paid where such payment was made from the funds held in Non-Resident External account for acquisition of the property. iii) In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties. In the case of sale of immovable property purchased out of Rupee funds, ADs may allow the facility of repatriation of funds out of balances held by NRIs/PIO in their Non-resident Rupee (NRO) accounts upto US$ 1 million per financial year subject to production of undertaking by the remitter and a certificate from the Chartered Accountant in the formats prescribed by the CBDT. Prior permission for acquisition or transfer of immovable property in India by citizens of certain countries No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan shall acquire or transfer immovable property in India, other than lease, not exceeding five years without prior permission of Reserve Bank. Foreign nationals of non-Indian origin resident outside India are not permitted to acquire any immovable property in India unless such property is acquired by way of inheritance from a person who was resident in India. Foreign Nationals of non Indian origin who have acquired immovable property in India by way of inheritance with the specific approval of RBI cannot transfer such property without prior permission of RBI.   Part III Establishment of Branch/Liaison/Project Offices in India Application to RBI Companies incorporated outside India, desirous of opening a Liaison/Branch Office in India have to make an application in form FNC-1 to the Reserve Bank of India, along with the following documents: English version of the Certificate of Incorporation/ Registration or Memorandum & Articles of Association attested by Indian Embassy/ Notary Public in the Country of Registration. Latest Audited Balance Sheet of the applicant entity. Liaison Offices Companies which are incorporated outside India can establish Liaison Office in India with the specific approval of the Reserve Bank. A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office of RBI under whose jurisdiction the office is set up. A Liaison Office can undertake the following activities in India: ii) Representing in India the parent company/group companies. ii) Promoting export import from/to India. iii) Promoting technical/financial collaborations between parent/group companies and companies in India.   iv) Acting as a communication channel between the parent company and Indian companies. Liaison/representative offices have to file an Annual Activity Certificate from a Chartered Accountant to the Regional Office of RBI. The Certificate is obtained to ensure that the Liaison Office has undertaken only th

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-2008/18 · issued 02 Jul 2007. The plain-English explanation above is BankPulse’s own independent summary.

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