Purchase of Shares and Securities by Non-residents
10A.1 In terms of Section 29(1)(b) of FERA 1973, no person resident outside
India, whether an individual or a firm/company (other than a banking company)
incorporated outside India, can acquire shares of any company carrying on trading,
commercial or industrial activity in India without permission of Reserve Bank.
Permission of Reserve Bank is also required for transfer or issue of any security
(which includes shares, debentures, bonds, etc.) to a person resident outside
India in terms of Sections 19(1)(b) or 19(1)(d) of the Act. While granting permission
for transfer or issue of shares to a non-resident investor under Section 19(1)(b)
or 19(1)(d), permission under Section 29(1)(b) for purchase of shares by him
is granted simultaneously and hence it is not generally necessary for non-resident
investors to apply separately for permission to purchase shares in Indian companies
in such cases.
A. Issue and transfer of Indian rupee shares and securities to any person resident
in Nepal requires permission of Reserve Bank.
B. Section 19(1)(b) of the Act also prohibits creation or transfer of any interest
in a security in favour of a non-resident. This prohibition also precludes pledging
of any security to or in favour of a non-resident (e.g. as collateral or prime
security for credit facilities abroad) or utilising them for forming a trust
or settlement of which a non-resident is the beneficiary .
C. Reserve Bank has granted general permission (i) to persons of Indian nationality/origin(NRIs)
to subscribe to the Memorandum and Articles of Association and to take up shares
of an Indian company for its incorporation and (ii) to an Indian company to
issue shares to NRIs subject to certain conditions. The scope of the general
permission has been explained in paragraph
10B.2 (i) As per the Foreign Investment guidelines issued by the Government
of India, Ministry of Industry, foreign investment (equity/preference shares)
upto certain specified limits would be permitted by Reserve Bank under Automatic
Route as under:
(a) Foreign investment (equity/preference) upto 50% in respect
of Mining activities referred to in Part 'A' of Annexure III to Ministry of
Industry's Press Note No.14 (1997 Series) dated 8th October 1997;
(b) Foreign investment (equity/preference) upto 51% in (i)
industries/items included in part 'B' of Annexure III to Ministry of Industry's
Press Note No.14 (1997 series) dated 8th October 1997 and (ii) a trading company
primarily engaged in export activity;
(c) Foreign investment (equity/preference) upto 74% in industries/items
included in part 'C' of Annexure III to Ministry of Industry's Press Note No.14
(1997 series) dated 8th October 1997;
(d) Foreign Investment upto 100% in industries/items included
in Part ‘D’ of Annexure III, to Ministry of Industry’s Press
Note No.14(1997 Series) as amended from time to time provided the foreign investment
in a project does not exceed Rs.1500 crores.
Existing Indian companies are also permitted to raise foreign
investment (equity/preference) to the level permissible as indicated above under
the Automatic Route in case the company is engaged in the manufacture of item/s
included in the Annexure III industries or the proposed expansion of capital
is for undertaking an activity covered under the said Annexure. Raising of foreign
investment (equity/preference) upto 51% in an existing trading company [cf.
sub-paragraph 10B.,2(i)(b)(i) above] will be permitted if the company has already
been registered as Export/Trading/Star Trading House.
Reserve Bank, vide its Notifications No.F.E.R.A.180/98-RB dated
13th January 1998 as amended by Notification No.F.E.R.A.188/98-RB dated 11th
November 1998 has granted general permission under Sections 19(1) (a), 19(1)(d)
and 29(1)(b) of Foreign Exchange Regulation Act, 1973 to Indian companies for
issue and export of equity/preference shares to foreign investors in respect
of eligible investments under the Automatic Route. As a result of the general
permission, Indian companies seeking foreign investment (equity/preference)
under the Automatic Route of Reserve Bank and satisfying the conditions laid
down in the said Notifications will not require prior clearance of Reserve Bank.
Such Indian companies may issue shares to foreign investors and file a declaration
in form FC(RBI) together with the required documents with the concerned Regional
Office of Reserve Bank under whose jurisdiction their registered office is situated,
within 30 days from the date of issue of shares to foreign investors/collaborators.
Accordingly, non-residents who have been issued shares under the general permission
granted by this Notification would not need specific approval under Section
29(1)(b) of FERA 1973 from Reserve Bank.
Issue of preference shares to Non-Resident Indians/Overseas
Corporate Bodies is also permitted under 100% Scheme.
(ii) Applications for foreign investment which do not satisfy
the parameters prescribed for Automatic Approval by Reserve Bank or in 100%
Export Oriented Units located outside the Export Processing Zones are required
to be made to the Secretariat for Industrial Assistance (SIA)/Foreign Investment
Promotion Board (FIPB), as the case may be. If the unit is located in any of
the Export Processing Zones, applications should be made to the Development
Commissioner of the Export Processing Zone concerned.
(iii) With a view to simplifying the procedure under SIA/FIPB route, Reserve
Bank, vide its Notification No.F.E.R.A.182/98-RB dated 10th February 1998 has
granted general permission under Sections 19(1) and 29(1)(b) of FERA 1973 to
Indian companies for issue and export of shares/securities to foreign investors/collaborators
in respect of such investments approved by SIA/FIPB. As a result of the general
permission, Indian companies seeking foreign investments based on the approvals
granted by SIA/FIPB and satisfying the conditions laid down in the notification
will not require any prior clearance of Reserve Bank. Such Indian companies
may issue shares to foreign investors/collaborators and file a declaration in
form ISD together with the required documents, with the concerned Regional Office
of Reserve Bank under whose jurisdiction their Registered Office is situated,
within 30 days from the date of issue of shares/securities to foreign investors/collaborators.
In the case of composite approvals granted by SIA/FIPB for foreign financial
as also technical collaborations, while issue of shares/securities will be governed
by the general permission, in respect of technical collaboration, the procedure
contained in paragraph 10B.1 should be followed
(iv) Retention of share subscriptions in foreign currency
accounts in India/abroad for financing import of capital goods, etc. requires
prior approval of Reserve Bank. Reserve Bank will also permit receipt of interest-free
loans as advance share subscription from the collaborators to be adjusted against
share capital contribution later, for meeting expenses in India of the Indian
Indian companies intending to raise foreign equity through preferential allotment
of shares to non-residents are required to comply with the guidelines issued
by Government of India, Reserve Bank of India, SEBI and other regulatory authorities
from time to time.
Purchase of Shares of Indian Companies by Private Arrangement
10C.8 NRIs/OCBs require permission of Reserve Bank for purchasing shares of
Indian companies by private arrangement. For this purpose, application in form
FNC 7 together with the non-repatriation undertaking in form NRU may be submitted
by the non-resident investor to the office of the Reserve Bank in whose jurisdiction
the company's Head/Registered Office is situated.
Investment in Domestic Public Sector and Private Sector Mutual Funds
10C.9 NRIs/OCBs will be permitted to invest in Mutual Funds floated by domestic
public sector and private sector mutual funds on non-repatriation basis. Applications
for the purpose should be made to Reserve Bank in form ISD by the concerned
bank/institution. The non-resident investors do not need separate approval from
Reserve Bank for the purpose.
Purchase of Shares of Indian Companies
11A.5 (i) Reserve Bank vide Notification No.F.E.R.A.206/99-RB
dated 31st July 1999 has granted general permission to Non-Residents to acquire
shares from other Non-Residents (except from NRIs/PIOs and OCBs). NRIs/PIOs
and OCBs are permitted to acquire shares from other NRIs/PIOs/OCBs. The rights
of transferee/purchaser in respect of shares so acquired, shall be subject to
same restrictions and conditions as were applicable to the transferor/seller
of the shares. In terms of the above-mentioned Notification, permission has
also been granted to a company incorporated in India and/or a depository defined
in clause (2) of sub-section 1 of Section 2 of Depository Act, 1996 to enter
in its register or books in which securities are registered or inscribed an
address outside India of a holder of any securities consequent upon acquisition
of such securities by non-residents as permitted above.
It is clarified that the notification No.F.E.R.A.206/99-RB
dated 31st July 1999 does not permit transfer of shares from NRIs/PIOs/OCBs
to foreign nationals/companies incorporated outside India. In such cases, the
transferee may approach the Secretariat for Industrial Assistance (SIA), Ministry
of Industry, Government of India, New Delhi for necessary permission. Subsequently
an application in form FNC 7 along with SIA's permission may be made to Reserve
Bank of India, Exchange Control Department, (Foreign Investment Division), Central
Office, Mumbai for necessary permission under Foreign Exchange Regulation Act,
Note: See paragraph paragraph 11A.12 for details regarding
exemption granted to foreign nationals of Indian origin permanently resident
(ii) Reserve Bank vide its Notification No.F.E.R.A.207/99-RB
dated 31st July 1999, has granted general permission to a person resident outside
India or a company incorporated outside India to acquire shares from the shareholders
who had acquired such shares as signatories to the Memorandum and Articles of
Association provided (i) the Indian company is permitted to become a 100% owned
subsidiary and (ii) the total number of shares so acquired does not exceed 500
and (iii) the face value of the shares to be transferred is less than 0.1% (one
tenth of one per cent) of the paid-up capital. The company whose shares are
so released and/or a depository have also been granted general permission to
enter an address outside India in their books in respect of such shares.
(iii) Shares held by foreign companies/foreign nationals as
on 1.1.1974 were required to be declared to Reserve Bank. Licences were issued
by Reserve Bank granting permission to hold such shares declared specifying
the eligibility or otherwise of the holder for repatriation of the capital and
income earned thereon (See paragraph 10A.2).