While the new dispensation will add to the ease of making investments in India, regulators will have to keep a close watch to avoid history repeating itself
The far-reaching changes in the regulatory regime for foreign direct investment (FDI), as per changes made by the recent press note (no. 12 dated 24 November 2015) (http://dipp.nic.in/English/acts_rules/Press_Notes/pn12_2015.pdf
) issued by Department of Industrial Policy & Promotion (DIPP), has also silently brought about a significant change. In the press note, overseas corporate bodies (OCBs), which were de-recognised in 2003, have been re-recognised.
This re-recognition comes by virtue of para 3.1.3 of the FDI Policy, which says: A company, trust and partnership firm incorporated outside India and owned and controlled by non-resident Indians can invest in India with the special dispensation as available to Non-Resident Indians (NRIs) under the FDI policy.
After the stock scam of 1992, Securities and Exchange Board of India (SEBI) investigations discovered NRIs setting-up OCBs in Mauritius for the purpose of carrying out high-value transactions to gain tax benefits. Based on the investigations, OCBs were disallowed from making an investments in India under the portfolio investment scheme (PIS) vide Notification No. FEMA 46
dated 29 November 2001.
NRIs were allowed to hold the shares and convertible debentures purchased under PIS till such time these are sold on stock exchanges in India and the authorised dealer (AD) shall continue to report, every sale transactions undertaken by the OCBs. They were also allowed to enjoy the facilities of opening and maintaining non-resident accounts and were considered to be eligible for making FDI, under Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.
The Reserve Bank of India (RBI) carried on review of investment activities of OCBs in India on the recommendations of Joint Parliamentary Committee (JPC) on Security Market Scam. Considering the fact that the OCBs were owned by individuals (i.e. either by Indians or NRIs) and not being regulated by any of the regulatory authority, they were de-recognised in October 2003 by passing Foreign Exchange Management (Withdrawal of General Permission to Overseas Corporate Bodies (OCBs)) Regulations, 2003
. Hence, OCBs as a separate 'class of investor' entity were not be allowed to make fresh investments in India under various routes/ schemes available under the FEMA provisions including FDI.
New rule for overseas NRI bodies: Earlier, there was a requirement of 60% NRI control – now it is merely controlling the management and holding more than 50% of capital. Amended para 2.1.7 states: ‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements. Amended para 2.1.28 states: A company is considered as 'Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens;
The body need not be a corporate body – it may be either a company or trust or partnership firm.
Special dispensation for investment by NRIs: Special dispensations available to NRIs, which may not be available to other non-residents, are as follows:
Press note no. 7 dated 3 June 2015 allowed investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Securities by Persons Resident Outside India) Regulations, 2000 (FDI Regulations) shall be deemed to be domestic investment at par with the investment made by residents;
FDI cap shall not apply if NRIs make an investment through Schedule 4 of FDI Regulations;
As per Para 3.1.5, NRIs under Schedules 3 of FDI Regulations, can invest/trade through a registered broker in the capital of Indian Companies on recognised Indian Stock Exchanges. However, the same is not the case for other non-residents except for registered FIIs and FPIs;
Para 3.2.2 states that an NRI can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis subject to fulfilment of conditions specified therein;
The press note amended the definition of NRI to mean an individual resident outside India who is a citizen of India or is Overseas Citizen of Indian Origin (OCIO) cardholder within the meaning of section 7(A) of the Citizenship Act 1955. Person of Indian Origin (PIO) cardholders registered as such under Notification No. 26011/4/48 FI, dated 19 August 2002, issued by the Central Government are deemed to be "Overseas Citizen of India" cardholders.
Impact of the amendment: Several NRIs may either already have OCBs in foreign jurisdictions or they may find it easy to form such bodies in lightly regulated jurisdictions, particularly those that have comprehensive Double Taxation Avoidance Treaties (DTAT) with India. NRIs may find it much better to invest through bodies registered outside India, than to form bodies in India.
While, the new dispensation will add to the ease of making investments in India, regulators will have to keep a close watch to avoid history repeating itself.
(Vinod Kothari is a chartered accountant, trainer and author. Nidhi Parmar works in Corporate Law Services Group at Vinod Kothari & Co)