Transfer or issue of security by person resident outside India

[GSR 406(E) dated 3rd May, 2000]
These regulations seek to regulate investment in India by persons resident outside India, i.e., issue of any security by an Indian entity to a person resident outside India and purchase, sale of Indian securities by a person resident outside India.

Five Categories
For the purpose of these Regulations, the investment in India by persons resident outside India has been divided in five categories and the regulations applicable have been specified in respective schedules, as under:-

Schedule 1 Investment under Foreign Direct Investment Scheme.
Schedule 2 Investment by Foreign Institutional Investors under Portfolio Investment Scheme.
Schedule 3 Investment by NRIs/OCBs under Portfolio Investment Scheme.
Schedule 4 Purchase and sale of shares by NRIs/OCBs on Non-repatriation basis.
Schedule 5 Purchase and sale of securities other than shares or convertible debentures of an Indian company by persons resident outside India.

Restrictions on issue
Citizens of Bangladesh, Pakistan or Sri Lanka resident outside India and entities in Bangladesh or Pakistan are not permitted to purchase shares or debentures issued by Indian companies or any other Indian security without the prior approval of Reserve Bank in terms of Regulation 5.

Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs) / Overseas Corporate Bodies (OCBs) and Foreign Venture Capital Investors (FVCIs) are not permitted to purchase shares or convertible debentures of an Indian company which is engaged in the print media sector.

General Permissions
General permission has been granted (Regulation 6), to any person resident outside India to purchase shares/convertible debentures offered on right basis by an Indian company which satisfies the conditions stipulated in sub-regulation (2). The right shares so acquired shall be subject to same conditions including restrictions regarding repatriability as are applicable to original shares.

General permission has been granted to the transferee company or a new company consequent on merger or de-merger or amalgamation of Indian companies subject to conditions mentioned in Regulation 7.

An Indian company has been permitted to issue shares to its employees or employees of its joint venture /subsidiary abroad, who are resident outside India either directly to such employees or through a Trust, subject to the provisions of Regulation 8.

General permission has been granted (Regulation 9) for transfer of shares/convertible debentures by a person resident outside India as under:-

i.for transfer of shares /convertible debentures held by a person resident outside India other than NRI/OCB to any person resident outside India, provided that the transferee should have obtained permission of Central Government if he had had any previous venture or tie-up in India through investment in any manner or a technical collaboration or trade mark agreement in the same field or allied field in which the Indian company whose shares are being transferred, is engaged;

• A NRI/OCB is permitted to transfer shares or debentures of Indian company to another NRI/OCB.
• A person resident outside India is permitted to transfer shares/debentures of an Indian company to a person resident in India by way of gift.

Transfer of any security by way of gift by a person resident in India to person resident outside India would require approval of Reserve Bank (Regulation 10A).

For transfer of existing shares/convertible debentures of an Indian company by a resident to a non-resident by way of sale, the transferor should first obtain an approval of the Central Government and thereafter apply to Reserve Bank (Form FNC-7 as prescribed by Reserve Bank under FERA regulations may be used till any other Form is prescribed for the purpose by Reserve Bank). In such cases the Reserve Bank may permit the transfer subject to such terms and conditions as it may prescribe including the price at which sale may be made.

Any other transfer not covered by the above referred provisions or the provisions of the Schedules would require the approval of Reserve Bank for which the application should be made in Form TS-1. For arriving at the sale price of the shares in such cases, the procedure indicated in Regulation 10B(2) should be followed.

General permission has been granted (Regulation 11) for remittance of net sale proceeds (net of applicable taxes) of a security sold by a person resident outside India provided:-

• the security is held on repatriation basis;

• security is sold on recognized stock exchange or the Reserve Bank’s permission for sale of security and remittance of sale proceeds has been obtained; and

• a NOC/Tax Clearance Certificate from Income-tax authorities or an undertaking/ declaration as per the provisions of 3B.10 OF Exchange Control Manual has been produced.

Schedule 1 -Foreign Direct Investment Scheme
Reserve Bank Automatic Route

• An Indian company which is not engaged in any activity, or in manufacturing of item included in Annexure ‘A’ to this Schedule, may issue shares or convertible debentures to a person resident outside India, up to the extent specified in Annexure ‘B’, on repatriation basis, provided-

  • The issuer company does not require an industrial licence;

  • The shares or convertible debentures are not being issued with a view to acquiring existing shares of another Indian company;

  • If the person resident outside India to whom the shares are being issued proposes to be a collaborator, he should have obtained Central Government’s approval if he had any previous investment /collaboration /tie up in India in the same or allied field in which the Indian company issuing shares is engaged