Reserve Bank of India - Exchange Control Manual

Exchange Control Manual

Purchase of shares securities
Date : Jun 03, 2005
10A.1, 10B.2, 10C.8, 11A.5
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. NOTES: 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 company. NOTE: 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, 1973. Note: See paragraph paragraph 11A.12 for details regarding exemption granted to foreign nationals of Indian origin permanently resident in India. (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).

Purchase of shares securities

Date : Jun 03, 2005

10A.1, 10B.2, 10C.8, 11A.5

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.

NOTES:
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 company.

NOTE:
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, 1973.

Note: See paragraph paragraph 11A.12 for details regarding exemption granted to foreign nationals of Indian origin permanently resident in India.

(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).