Liberalization of Investments by Non-Resident Indians

Non-resident
Indians (NRIs) have long been considered as a separate category of investors who
have enjoyed some privileges compared to other classes of foreign investors.
NRIs have been allowed to investment either on a repatriable basis (with more
stringent norms) and on a non-repatriable basis (with less stringent norms).
Earlier this week,
by way of Press
Note No. 7 (2015 Series)
, the Government of India introduced further
changes to the Foreign Direct Investment (FDI) Policy relating to NRI
investments. The changes relate to two aspects: (i) the definition of an NRI,
and (ii) investments by NRIs on a non-repatriable basis.
Until this week’s
change, for the purposes of foreign investment an NRI was defined to mean a
non-resident person who is a citizen of India or one who is a person of Indian
origin (PIO).[1]
However, in January 2015, the Government of India did
away with the concept of PIO
by effectively merging it with the Overseas
Citizen of India (OCI). An OCI is defined in section 7A of the Citizenship Act,
1955 in a manner similar to that of the PIO, but in more restrictive terms. For
example, a great grandchild of a citizen and a spouse of a citizen are not
included within an OCI.
Given this transition
from PIO to OCI, under the new Press Note, for foreign investment purposes, an
NRI would now mean an overseas resident who is either a citizen of India or an
OCI cardholder. It appears that this change in the foreign investment policy is
largely driven by the preceding changes to the Citizenship Act, and the need to
streamline the policies.
The more
substantive change in Press Note No. 7 relates to the fact that NRI investments
made on a non-repatriable basis will now “be deemed to be domestic investment
at par with the investment made by residents”. NRI investments on a
non-repatriable basis are to be made in accordance with Schedule 4 of the FEMA
(Transfer or Issue of Security by Persons Resident Outside India) Regulations,
2000. The new change is significant as NRI investments on a non-repatriable
basis would now been treated as domestic investments for various purposes,
including sectoral caps, pricing guidelines, types of investment instruments,
downstream investments, and the like. This would give rise to additional structuring
opportunities for foreign investments.
While the Press Note
indicates the broader change in the nature of the policy for NRI investments on
a non-repatriable basis, the details have to be contained in the necessary
amendments, including to Schedule 4 of the FEMA Regulations discussed above.



[1] A PIO was
a foreign citizen who (i) held at any time an Indian passport, (ii) has either
parents, grandparents or great grandparents who were born in and were permanent
residents of India, or is a spouse of a citizen or other persons referred to in
(i) and (ii). See: http://www.immihelp.com/nri/piocard/.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • OFFHAND
    "GIVEN THIS TRANSITION FROM PIO TO OCI, under the new Press Note, for foreign investment purposes, AN NRI WOULD NOW MEAN AN OVERSEAS RESIDENT WHO IS EITHER A CITIZEN OF INDIA OR AN OCI CARDHOLDER."
    (FONT supplied)
    A Quick thought (intending to provoke more): All such changes being conceived of and brought in lately in quick succession, through Press Notes, are, as stated, for limited purposes of allowing investments. So far as one could readily visualize, those should have no consequence or impact for purposes of income taxation; except, perhaps, for taxation of 'gifts'.
    Any purposive thoughts on a varying wavelength?

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