A Dissertation (Doctrinal)

ON

POLICIES AND LEGISLATION TO PROTECT NRI INVESTMENT IN

INDIA

submitted to the
DEPARTMENT OF LAW
JAI NARAIN VYAS UNIVERSITY, JODHPUR
In the partial fulfillment of Course - IV of
LL.M. III Semester in business Law Branch

Under the Supervision of Submmited by

Sunil Asopa Ayushi singhal

Roll No. 23LLM30088

FACULTY OF LAW

JAI NARAIN VYAS UNIVERSITY, JODHPUR

2023-2024

1
 DECLARATION

I Ayushi Singhal, student of LL.M III-Semester, Business Law Branch do hereby

declare that:

1. The work contained in this dissertation is my own work and is original.

2. The present work has not been submitted to any other University for any degree
3. I have followed the guidelines of the University.
4. I have properly acknowledged the material collected from secondary sources
wherever required
5. I own the responsibility for the originality of the entire contents.

________________
Signature of student
Date: Ayushi singhal

2
PROF. SUNIL ASOPA

Faculty of Law

Jai Narain Vyas University,

Jodhpur

CERTIFICATE
This is to certify that Ayushi Singhal, is a student of LL.M III Semester, Constitution
Law branch, Faculty of Law, Jai Narain Vyas University, Jodhpur. She has completed
the dissertation entitled “POLICIES AND LEGISLATION TO PROTECT NRI
INVESTMENT OF INDIA” under my supervision. She has carried her work with
utmost sincerity and dedication.

__________________

Signature of supervisor

3
 ACKNOWLEDGEMENT

I would like to express my deepest gratitude and appreciation to all those who have
supported and guided me throughout the completion of this LLM thesis. Firstly, I am
indebted to my supervisor, Prof. Sunil Asopa Sir, for their invaluable insights,
unwavering support, and constructive feedback, which have been instrumental in
shaping this work.

I would also like to extend my heartfelt thanks to my family and friends for their
encouragement, patience, and understanding during this academic journey. Your
belief in me has been a constant source of motivation.

Furthermore, I want to acknowledge the assistance of Jai Narain Vyas University,

faculty and staff, especially the Faculty of Law, for providing the necessary resources
and research facilities. Lastly, I appreciate the countless authors, scholars, and legal
experts whose work and contributions have enriched this thesis.

Their dedication to advancing legal knowledge is an inspiration. This thesis would not
have been possible without the collective support and guidance I have received. Thank
you all for being an integral part of this academic endeavor.

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Table of Contents
CHAPTER :1 INTRODUCTION ................................................................................................... 7
1.1 Background and context of NRI investments in India ....................................................... 7
1.2 Significance of NRIs as investors in the Indian economy ................................................. 11
1.3 Scope of the Study And Review Of Literature .................................................................. 12
Review of Literature .............................................................................................................. 13
CHAPTER – 2 THE NON-RESIDENT INDIAN ................................................................... 15
THE NON-RESIDENT INDIAN .............................................................................................. 15
2.1 Definition of Non-Resident Indian (NRI) ...................................................................... 15
2.2 According to FEMA Act, 1999 ....................................................................................... 22
2.3 2024: The Golden Gateway Opens for NRI Investments ................................................. 23
CHAPTER – 3 NON-RESIDENT INDIAN BANK ACCOUNTS ............................................. 25
3.1 INTRODUCTION................................................................................................................ 25
3.2 Salient Features of NRI bank accounts .............................................................................. 25
3.3 Nomination Facility ............................................................................................................. 28
3.4 Foreign Inward Remittances Payment System (FIRPS) .................................................. 28
CHAPTER – 4 AVENUES OF INVESTMENT IN INDIA ....................................................... 29
4.1 Types of investment. ............................................................................................................ 29
4.2 NRI Funds Inflow ................................................................................................................ 41
4.3 Assistance from The Indian Investment Centre, State Government Agencies and Banks
...................................................................................................................................................... 41
4.4 Facilities for Returning Indians .......................................................................................... 42
4.5 Facilities to NRIs Under EXIY Policy ................................................................................ 43
4.6 Incentives and Concessions to NRI ................................................................................... 46
CHAPTER -5 Evolution of Liberalization Policies..................................................................... 48
5.1 Introduction .......................................................................................................................... 48
5.2 Liberalization of Tax Provisions ........................................................................................ 50
5.3. Liberalization to Portfolio Investments......................................................................... 52
5.4.Liberalization in the Period of Stay in India ..................................................................... 55
5.5 TREND OF NRI INVESTMENT IN BANK DEPOSITS ................................................ 56

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 Table 5.1 .................................................................................................................................. 59
CHAPTER – 6 Direct Portfolio Investment By NRIs................................................................. 61
6.1. Direct Investment by NRIs ................................................................................................. 61
Table-6.1 ................................................................................................................................. 64
Table-6.2 ................................................................................................................................. 65
Table-6.3 ................................................................................................................................. 66
6.2 NRIs Investment in Industrial Sectors ............................................................................... 67
6.3 Portfolio Investment by NRIs (Shares &Debentures) ...................................................... 69
4.6 NRIs Investment in Company Deposits ............................................................................. 74
CHAPTER – 7 SUMMARY OF FINDINGS AND SUGGESTIONS ....................................... 78
7.1 SUMMARY .......................................................................................................................... 78
7.2 Findings................................................................................................................................. 83
7.3 Suggestions............................................................................................................................ 88
7.4 Scope for Further Research ................................................................................................ 91
7.5 RECENT TRENDS, CONCLUSIONS & FINDINGS ..................................................... 92
APPENDIX - I ................................................................................................................................ 98
APPENDIX – II ............................................................................................................................ 100
APPENDIX - III ........................................................................................................................... 101
BIBLIOGRAPHY ........................................................................................................................ 104
Abbreviations Used ...................................................................................................................... 110

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 CHAPTER :1 INTRODUCTION

1.1 Background and context of NRI investments in India

About 1500 years ago, the Tamil Poet Avaiyar said to the young men of her
generation: "Go across many seas and seek the wealth of human achievements." The
enduring maritime, commercial and cultural contacts that Indians of her generation
forged with South East nations have led to a strong Indian presence there.1

India, while poor in material terms, is rich in talent, ambition and drive. This means
that Indians have been able to go to the farthest corners of the globe carrying with
them no capital, but relying solely upon their intrinsic abilities, their willingness to
work and determination to succeed.2

In almost every country of the world there is a sizeable population of Indians. Many
had migrated generations ago and settled down there as nationals of the country of
their adoption. In more recent years, there has been a revival of migration3. Some have
taken up short-term assignments, while others have taken up long-term residence
abroad. Although many of them have become citizens of other countries, their social,
cultural, and emotional ties with India and Indians have continued to be strong. As a
result of their hard work and initiative, they have accumulated large resources of
investible funds.

It is an indisputable fact that India needs a substantial inflow of capital resources from
abroad. This is mainly to supplement domestic savings, and also to finance the deficit
in the balance of payments and trade.

1 Jerry Rao, Indians Abroad — Coming of age, Business India (The Magazine of the Corporate World), Bombay, 2—
15 May, 1988, p.90.
2
Gopaldoss. B,- Facilities and Incentives for Non—resident Indians, Chartered Accountant, Vol. XXXVII , No. 3 ,
Septemker, -1988
3
Agrawal. A. N, Varma. H.o, Gupta. R.c, " India" EconomicInformation Yearbook, 1988—89, National Publishers
House , New Defhi,

7
To de over the difficult balance of payments situation, and to bring about a turn-round
in the balance of payments, the Government of India (GOI) have initiated a number
of measures to generate additional resources through different channes 4 . It is a
recognised fact that the Non-Resident Indians (NRIs) command sizeable resources in
terms of finance, scientific talent and technical know-how.

Though they are settled in distant lands, their links with India still continue to help
mobilisation of resources 5 . In a developing economy, like India, investments
fromNRIs are indispensable to accelerate the rate of industrialisation and growth, and
they have assumed a great importance in recent years.

There are about 12 million NRIs spread over 142 countries. Given attractive facilities
and incentives, estimates of NRI funds seeking investment in India vary from
Rs.10,000 crores to 15,000 crores per years. The success of NRIs in the scientific,
economic and cultural fields has been a matter of great satisfaction to the country.
India has had a continued association with them, and their investments have been
playing a significant role in the crucial area of the country's balance of payments6.

The NRIs have contributed greatly to the industrial promotion and development of the
country by making available foreign exchange, technical skill,entrepreneurship,
knowledge and contacts with international market, etc. A large number of them settled
in developed countries like the UK, the USA, West Germany, Canada, etc., have at
their command immense technical talents; most of them have migrated after their
professional education in engineering, science or technology in India; they have
worked in those countries for more than two or three decades specialising in their
chosen areas, and benefitting from the exposure to and knowledge about the most
advanced technologies.

4
Agrawal. H. P, Investment Guidelines for Indians Abroad, (1984), Aruna Publications, New Delhi,
5
Kuldeep K. Hajeela , 'I A Complete Guide for Non—resident Indians", Jaico Publishing House, Bombay,
6
Exchange Control Facilities for Investment YLNRIs, (1%9), RBI, Regant Publishers Pvt. Ltd., Bombay,

8
The GOI naturally stressed upon the technological opportunities in the country to
modernize itself at a fast pace, and therefore asked the NRIs to use the various
facilities offered for their investments. Apart from the technological imperative, NRI
investment is welcome for the capital it would bring into the country 7 . India is
critically short at the margin of financial resources, and outlays for serval crucial areas
in the public sector in the Seventh Plan are being kept at lower than desirable levels.
A shift from the public to private sector is no solution to the resources constraints.
What is needed is an increase in resources for additional investment, and this can come
from outside. Here NRIs can play a very constructive role. There are some issues of
NRI policy which deserve special attention. First of all, why should India promote
NRI investment? Is it worth the trouble? As a potential source of foreign funds, the
NRI contribution certainly is worthwhile. It might look small today, but given the
incentives, it is possible that India could mop up a fair amount over a period of time.

When liberalization of NRI investments was announced in the Budget speech for
1982-83, the amount invested by NRIs that year in these schemes was Rs.59.63 crores.
It steadily rose to Rs.883.86 crores in 1986-87, and crossed the Rs. 1,000 crores mark
at Rs. 1,025.76 crores by December, 19878.

However, despite several incentives, the NRI fund flow has not picked up to the
desired level, especially the investment inflow. In fact, the composition of funds flow
is highly skewed. Eventhough the total investment made by NRIs in different schemes
has been increasing, the rate of growth of investments has been declining of late. It
was about Rs. 1,970 crores in the initial year of the scheme. The increase in investment
was about 48 per cent in 1985-86 over 1984-85, 43 per cent9 in 1986-87 over 1985-
86.

7
Venkataraman. P. A, NRI Deposits and Profi tability , Financial Express (Daily), October 4, 1983,
8
SUshi1 K. Jain, Investment Opportunities, NRI Investment
9
Bishwajit Bhattacharyya, Direct Tax Reforms and NR1s, Financial Express, October 5, 1989,

9
NRIs may broadly fall under two categories; those in the Gulf regions and those in
other countries. The majority of the NRIs in the Gulf regions have gone for taking up
employments which may not last indefinitely, and have to return to India on the expiry
of Lacer employment period and visa. Regardless of incentives offered, these NRIs
would invest in India. It is for NRIs in other countries for whom the incentives are
relevant. It will not be administratively possible to formulate different sets of
incentives even if they be not discriminatory. Though NRIs in other countries may
have various social, political, if not purely patriotic reasons for making investments
in India, their investment decisions may also be based on financial reasons10.

On the otherhand, it may be difficult to some of the NRIs to play a vital role in the
development of their homeland, as they have already decided to settle abroad
permanently. But there are quite a number of them who are uncertain whether they
would like to make the foreign country their permanent home. Many NRIs have a
distant vision or hope of returning to their homeland someday to stay permanently.
There are others who plan to return to India on retiring from service with very
comfortable foreign pension plans11.

The GO1 has all along been following liberal policies for the promotion of NRI
investment, offering many facilities for NRI investment in India. Realizing the
importance of and the imperative need for NRI funds, India today provides several
more incentives and concessions.

These are also available to overseas corporate bodies (OCBs), companies, partnership
firms, trusts, societies and other corporate bodies owned to the extent of at least 60
per cent by NRIs or persons of Indian origin.

10
Piparaiya. R. K, Expatriate Funds : Rhetories and
Indian Express, February 14, 1983.
11
Dhawan. O. P, Non—resident Indian Investment Facilities, (1985), 4th Ed., Standard Booksellers, Daribar Kalan ,
Delhi.

10
In 1979, the Ministry of Finance appointed a working group to study the trends in the
flow of inward remittances, and suggest ways and means of facilitating the
deployment in India of the savings of Indians abroad Of late, the GO1 has no doubt
provided more facilities and fiscal incentives to NRIs as compared to what were
available in earlier years.

The present study seeks to analyses objectively the various facilities, incentives and
policies in this direction. It also aims to study the trend and progress of NRI
investments in various schemes, the general awareness of the facilities and
concessions, and investment patterns of NRIs, and to offer recommendations to woo
more funds from NRIs through various channels.

1.2 Significance of NRIs as investors in the Indian economy

Indian economy is undergoing a significant structural change. There is a definite need

to assess how more and more enterprises in India through NRI funds can be
encouraged, and how the investments can be channelized on a long-term or permanent
basis12.

In order to facilitate mobilization of savings of NRI investment in India, a number of

initiatives were taken during the last decade, in addition to providing several
incentives to NHIs. Further, a number of concessions are also available to those who
are desirous of setting up industrial units in India, either independently or in
collaboration with resident Indians. In the same way, the GO1 adopts a liberalized
policy on the NRI investment in corporate securities also.

12
.Muthuramn. P.R, Implications of NRI Interest Rate Cut, Fiuncial Express , September 14, 1985,

11
One can expect that such a liberalized investment climate should reflect a positive
response to the NRI investments in India. The various incentives and concessions
offered by the GO1 should also have created a favorable climate to NRIs.

However, it is generally felt that such a large dose of liberalization measures,

procedures, tax-benefits and concessions has not made the expected significant mark.
Instead, there is a slowing down of interest on the part of NRIs in remitting their hard-
earned savings to their homeland. Hence it is attempted in this study to find out the
reasons for this state of affairs.

1.3 Scope of the Study And Review Of Literature

The role of NRIs in the industrial and economic development of the country is gaining
importance day-by-day, and the GO1 is continuously taking serious efforts towards
liberalizing the procedures and widening the scope of investment opportunities13 .An
attempt has been made to study as well the trend and progress of NRI investments in
India in various fields. The scope of the study is limited to the existing investment
schemes of direct and portfolio investment, bank deposits and other investment
opportunities available to NRIs. It also discusses the incentives and concessions that
are being made available to NRIs, and the special role of NRIs in increasing the
foreign exchange earnings; it traces out the evolution of NRI investment policy, and
amplification of non-residential status under Exchange Control and Income Tax
Regulations.

13NRI Funds, NRI Investment Opportunities, February 7,

1990,

12
Further, it is intended to examine how far the NRIs are aware of the situation to avail
themselves of the opportunities and benefits presently available to them. An attempt
is also made to analyses the investment pattern of NRIs, and the impact of the
incentives and concessions on the NRI investments.

Review of Literature
The accumulation of scientific knowledge is a slow and gradual process, in which an
investigator builds on the works of the past, and his findings serve as a starting point
for the future. The more links that can be established between a given study and other
studies or a body of theory, the greater the contribution. A review of the existing
literature on NRI investment and their status bears that the GO1 has been endeavoring
to popularize this scalar. It appears, However, that no such systematic research work
has been done in this field.

Though there is abundant literature of a general type on the investment opportunities

for NRIs and procedures in India, few books have been written in this area. On the
other hand, the GO1 has, from time to time, set up a number of committees, study
teams, and has organized conferences, and workshops to examine the different aspects
and problems of NIIIs.

Since the subject of the research area is new and of current interest, no systematic and
formal study of the NRI investments in India has been attempted before. However, in
this field, some experts have attempted to contribute some inferences relating to NRI
investments in India. Mohammed Baque from the Economic Forum for Indian
Expatriates, Jeddha, conducted in 1988 a survey to assess the savings of over ten lakhs
NRIs who were working in the Gulf countries. According to the study, cash amounting
to Rs.20,000 million was lying idle because the state and the central Governments
have neglected to channelize those resources into suitable schemes. Around half of
the amount belongs to the four lakhs NRIs working in the Saudi Arabia.14

14
Shabbir, u. S, NRI Investment in Industries - 11 , NRI Investment Opportunities, 1-15 May, 1990,

13
The study also reveals that 40 per cent of the NRIs from Saudi Arabia could invest
amounts up to Rs.50,000, 23 per cent up to Rs.25,000, 17 per cent up to Rs.1 lakh,
and just 9.2 per cent above Rs.1 lakh in any investment schemes in India.

Mr.Baquer also made several suggestions such as the following to encourage NRI
investments in self-employment as well as in major industrial projects: creation of
mutual funds for those returning from West Asia for investing their savings, granting
permission to promote cooperative rural banks to support schemes promoted by NRIs,
duty-free import of equipment’s and tools, and preparation of schemes suitable for
skilled and semi-skilled workers. Incidentally, skilled and semi-skilled workers
constitute about 72 per cent of the 11 lakh NRIs in the Gulf countries. He has also
suggested that 25 per cent of the seats should be reserved for NRIs who desire to join
the National Institute of Small Industry Extension Training (NISIET), and the GO1
should offer innovative incentives such as reduction of customs tariff on a selective
basis. S.C. Goyal15 who conducted a study of the share structure of 100 major private
companies said that their control can go into the hands of NRIs only with the help of
the WI, which has a sizeable shareholding in each of them. And also he noted that
individual families or business houses at that time managing various companies were
doing so "by courtesy of the Government. "

The recent liberalization of NRI investment rules has opened up a vast opportunity for
NRI investment in India. A recent study, "Investing in India" by India International
Incorporation, n Washington-based trade consulting firm, in collaboration with US
State Department and the US Overseas Private Investment Corporation (OPIC),
reported that 34 Indo-US collaborations averaged 20.3 per cent annual profit after tax
during the period 1976-81. The major contributory factors to this success, as
enumerated in this study, are the availability of cheap labour and the vast internal
market that is offered by India.

15
'NRI Investment Sops Pragmatic' , Financial Express, May 2, 1983

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 CHAPTER – 2 THE NON-RESIDENT INDIAN

THE NON-RESIDENT INDIAN

In its widest form, the term "non-resident investment" encompasses all foreign
investments in India whether by foreigners or by Indian citizens settled abroad. This
study however, confines itself to investments in India by non-resident Indians.

2.1 Definition of Non-Resident Indian (NRI)

To start with, who is a non-resident Indian (NRI)?

In simple terms an NRI is a person who is not resident in India. It does not, however,
follow that a person's residential status keeps changing whenever he goes abroad and
irrespective of the duration of his sojourn outside India. For a proper appreciation of
the term "NRI",

therefore, one has to turn to Section 2(p) of the FERA.

According to Section 2(p) which defines "person resident in India", an NRI is an

Indian citizen who stays abroad for employment, business or vocation or for any other
purpose in circumstances indicating an indefinite period of stay outside India.

Other examples of NRIs are Indian citizens working abroad on assignments with
foreign governments / government agencies or international/regional agencies like the
United Nations Organization (UNO) (including its affiliates), the International
Monetary Fund (I.M.F.), the International Bank for Reconstruction and Development
(IBRD), the World Health Organization (WHO) etc. Officials of the Central and State
Governments and public sector undertakings deputed abroad on temporary
assignments or posted to their offices abroad are also regarded as NRIs.16

16
The foreign management of India

15
Thus, Indian citizens who proceed abroad for higher studies, short business visits,
training, medical treatment etc., are treated as resident in India even during their
temporary absence from the country.

NRIs become residents of the country only when they return to India for permanent
stay. They continue to remain NRIs during their visits to the country during vacations.
A close examination of Sec. 2(p) will show that "person resident in India" includes

i. an Indian citizen who has been staying in India at any time after 25/3/47;
ii. a foreign citizen who stays in India for employment, business or vocation or in
circumstances indicating an indefinite stay here and
iii. a foreign citizen who comes and stays in India with his/her spouse if the spouse
is resident in India. It was on 25th March, 1947, that the very first Foreign
Exchange Regulation Act was passed in India hence the reference to this date
inSec.2(p). Thus, while an NRI is necessarily an Indian citizen a "person
resident in India" may include a foreigner also in certain circumstances.

(i) Definition of 'Indian Origin'

A person shall be aimed to be of Indian origin if

a. He, at any time, held an Indian Passport; or

b. He or either of his parents or any of his grandparents was an Indian and a
permanent resident of undivided India at any time.
c. A wife of a citizen of India, or of a person of Indian origin shall also be deemed
to be of Indian origin even though she may be of non-Indian origin. (However,
Pakistani or Bangladesh nationals of Indian origin can avail of these facilities
only after obtaining prior permission of the RBI).
d. Indian who permanently reside outside India and acquire foreign citizenship, or
the descendants of an Indian who migrated out of India, are also considered
persons of Indian origin.

16
(ii) Non-residential Status under Income Tax Act (ITA) 1961

(A). “Non -resident”

A non-resident is defined under chapter XII-A of the ITA as "an individual who is
either a citizen of India or a person of Indian origin but who is not resident in India.''
In other words, a non-resident is a person who is neither a 'resident' nor a 'resident but
not ordinarily resident.'

(B). "Resident but not ordinarily Resident" in India

A person who is said to be 'not ordinarily resident' in India if he is basically a 'resident'

in the year of evaluation and

1. His total stay in India in the last seven years preceding the year of evaluation

was less than 730 days, or

2. he was not 'resident' in 9 out of 10 years preceding the year of evaluation

(C). "Resident and ordinarily Resident" in India.

The status of an individual is said to be "resident and ordinarily resident" in India in a

particular year only

1. if he has been resident in India in 9 out of 10 previous years preceding that year,
and
2. during the 7 previous years preceding that year he has been in India for a total

period of 730 days or more.

(D) "Residents in India"

Under the ITA, an individual is considered to be a resident in India if he fulfils any of

the following conditions:

1. if he is in India in the relevant year (Apr.1 to Mar.31) for a period aggregating

182 days or more.

17
 2. if he is in India for a period aggregating 60 days or more in the relevant year,

and has been in India for an aggregate period of 365 days or more in the
preceding 4 years. In the case of an individual, being a citizen of India.
1. Who leaves India in any relevant year for employment outside India, the limit
of 60 days in clause (2) above shall be taken as 182 days.
2. Who being outside India, comes on a visit to India in any relevant year, the limit
of 60 days in clause (2) above shall be taken as 90 days.

Thus, Indian citizens who live abroad are permitted to stay in India up to 89 days in a
year without acquiring the status of a 'resident'. But such Indians who are not Indian
citizens are permitted to stay only up to 59 days in a year without acquiring the status
of 'resident'.

However, the recent amendment in the ITA allows NRIs to stay in India in a year for
a period up to 150 days, on a visit to India, without losing the status of 'nonresident'.

(iii) Amplification of non-residential Status under Exchange Control and Income

Tax Regulations

The said definition 1s rather general and there is a controversial aspect of FERA and
ITA regarding the NRI status. A brief discussion on the NRI status under these two
Acts, viz., FERA and ITA is presented below.

The FERA classifies all persons into two categories with reference to their residential
status:

a. persons resident in India and

b. persons resident outside India.
But the ITA classifies persons into three categories with reference to their
residential status:
a. resident and ordinarily resident,

b. resident, but not ordinarily resident and

c. non-resident.

18
The term 'Non-Resident Indian' has been defined for the purpose of chapter XI1 A of
ITA containing special provisions relating to certain income of non-residents.

Accordingly, section 115 C (e) defines NRI to mean an individual being a citizen of
India or a person of Indian origin who is not a resident. Explanation to section 115
C(e). states that a person shall be deemed to be of Indian origin if he or either of his
parents or any of his grandparents was born in undivided India.

As regards the determination of the residential status of a person, the provisions of

FERA are quite distinct from those of the ITA. Residential status under ITA depends
upon the period of stay in India in the previous year, and could be ascertained with
certainty in every case; that under FEHA depends on the intention of the person in
regard to stay in or out of India, irrespective of the period of stay, and thus could vary
from time to time depending upon the circumstances of the case.

The term Non-Resident individuals of Indian nationality or origin non-residents of

Indian nationality/origin has been used in the Exchange Control Manual (ECM) and
in circulars issued by the RBI for eligibility for availing of facilities for investment in
India.

Thus, It is clear that a person who is a resident under FERA could be a non-resident
under ITA and vice-versa. A great deal of confusion arises because of the ignorance
or inability of people to understand and appreciate this distinction.

It would be necessary to refer to the residential Status of a person under FERA as well
as under ITA and also in the respective NRI schemes in order to ascertain whether and
to what extent the facilities and incentives could be obtained by an NRI on the facts
and circumstances of each case. This is so because even within the provisions of the
ITA, in some exemption provisions, it has been stated that for the purpose of such
provisions the residential status under FERA and not that under ITA would be the
basis upon which the benefits of exemption would be available Section 10(4) (ii).

19
Also Foreign born wives of Indian citizens or persons of Indian origin are deemed to
be of Indian origin for various investment schemes; but they are not considered NRIs
for the purpose of the 'Special Provisions' for NRIs under ITA.

For the purpose of investment in different schemes, reference to NRI would mean
NRI nationality, or origin would also include Indians who have made their permanent
home outside India and acquired foreign citizenship, as. well as the descendants of
Indians who have migrated earlier from undivided India and acquired foreign
citizenship.

It should also be understood that unless a person is resident outside India, he is not
allowed to have foreign exchange assets (except with the permission of the RBI)
whether in the form of Foreign Currency Non-Resident Account (FCNR) , or Non-
Resident (External) Rupee Account (NRER), or other assets abroad; thus, the persons
availing themselves of investment facilities in India under the status of NRI must be
resident outside India' in terms of FERA regardless of whether they are resident and
ordinarily resident', or resident but not ordinarily resident', or non-resident' under ITA.

(iv) Overseas Corporate Bodies

Overseas Corporate Bodies 17 are predominantly owned by individuals of Indian

nationality or origin resident outside India. It also includes overseas companies,
partnership firms, societies and other corporate bodies which are owned, directly or
indirectly to the extent of at least 60 per cent of Indian nationality, or origin resident
outside India as also overseas trust of which at least 60 per cent of the beneficial
interest is irrevocably held by such persons.

17 NRIs/OCBs for Investment in India —Procedures , (June ,1988), 11C Publications, New Delhi,

20
(v) Foreign Exchange Asset

Foreign exchange asset18 means any specified asset acquired, purchased or subsided
to by the NRIs, in foreign currency, in accordance with the FERA 1973, and any rules
made thereunder.

(vi) Specified asset19

The specified assets are as follows:

i. Shares in an Indian Company

ii. Debentures issued by Public Limited Companies
iii. Deposits with Indian Public Limited Companies, and
iv. Securities of the Central/State Governments.

(vii) Resident Company

A company is said to be 'resident' in India in any previous year, if

i. it is an Indian company; or
ii. during previous year, the control and management of its affairs were situated
wholly in India.

18
Nishi th M. Desai, Non—residents Investments Incentives and Tax Planning: with Special Reference to Tax
Heavens (1986), Taxmann Publications (P) Ltd. , DelhT3

Pikale. S. V, and Pikale. G.S, Non—residents — Taxation and Investment in India, Jaico Book Publishing House,
19

Bombay.

21
2.2 According to FEMA Act, 1999
An individual is said to be a non-resident according to the FEMA Act, 1999 if a person
is a citizen of India but resides outside India.

According to the provision of FEMA, 1999 as contained in Section 2(v) person who
is a resident in India means if he resides in India for a period of more than 182 days
during the preceding year still there are few exceptions in which the above definition
is not applicable;

• If you stay out of India for the sake of employment.

• If you have gone abroad to set up your business.

• If you have gone abroad which explains your intention to stay outside

India.

In such cases, a person is regarded as a person outside India (NRI) if he stays in India
for more than 182 days. A person which is resident outside India if he resides in India
for 182 days or less than during the preceding year yet there are exceptions in which
the above definition does not apply;

• If an individual stay in India for the sake of employment.

• If an individual comes to India for setting up a business.

• If an individual comes to India for any reason which specifically clears the intention
of residing in India for a certain period of time.

For example; If an individual is settled abroad and comes to India for a reason other
than business or employment and has no such intention to stay in India then he is
considered to be a resident outside India.

22
2.3 2024: The Golden Gateway Opens for NRI Investments

As we turn the page to 2024, India’s investment landscape beckons to NRIs with a
siren of opportunity. Several factors converge to create a prime window for
participation, and here’s why:

1. Safe Harbor in a Stormy Sea: Stable Economic Environment India’s resilient

economy, even amidst global turbulence, is a beacon of security and stability for NRIs
seeking dependable investment havens. Navigating volatile waters, India has proven
its mettle, instilling confidence in NRIs about the long--term health of their
investments.

2. Open Arms for Investors: Favorable Government Policies the Indian government’s
proactive economic reforms and investor friendly policies offer NRI investments a
welcome mat. Initiatives like Make in India, Smart Cities, and ease of doing business
paint India as a land of possibilities, ripe for investment.

3. Building Bridges for Growth: Infrastructural Development With a hammer and

anvil approach, India is forging its future through massive infrastructure projects.
Modern highways, airports, and intelligent cities enhance connectivity and open,
vibrant investment avenues.

4. Homes for All: Affordable Housing Projects India’s focus on affordable housing
resonates with NRIs seeking sustainable and inclusive investment options.
Government-backed schemes and incentives create a win-win situation, fostering
social impact and attractive returns.

5. Weathering the Storm: Resilience Amid Global Challenges India’s ability to

weather global economic storms like a seasoned sailor makes it a safe investment
harbour. This resilience is a magnet for NRIs who value stability and long-term growth.

23
6. A Click Away from Bricks: Technological Advancements in Real Estate Virtual
reality tours, online transactions, and streamlined processes make investing in Indian
real estate a remote, hassle-free experience for NRIs. Technology bridges the physical
gap, empowering NRIs to invest with confidence.

7. Investing in the Future: Demonstrated Commitment to Sustainable

Growth India’s dedication to sustainable development and eco-friendly initiatives

aligns with the values of environmentally conscious NRIs. Green projects offer
socially responsible investments with promising returns.

8. Connected and Informed: Global Connectivity and Accessibility

Improved global connectivity and digital communication shrink distances and make
monitoring investments a breeze. NRIs can stay informed and engaged with their
Indian investments in real time, fostering a sense of connectedness and control.

Conclusion

With 2024 at the doorstep, the sky’s the limit for NRI investments in India. The
government’s unwavering commitment to economic growth and ongoing reforms
pave the way for a lucrative and fulfilling investment journey. Dive into the vibrant
real estate sector, explore new frontiers, and become a part of India’s remarkable
growth story.

24
 CHAPTER – 3 NON-RESIDENT INDIAN BANK
ACCOUNTS
3.1 INTRODUCTION
NRIs and persons of Indian origin resident abroad can open bank accounts in India
freely out of funds remitted from abroad or foreign exchange brought into the country
by them or from funds legitimately due to them in India. The RBI has permitted
Authorized Dealers in foreign exchange, listed in Appendix I, to open such accounts.

Non-resident bank accounts are of three types; -

a) Non-resident (External) Rupee Account (NRE A/c)

b) Foreign Currency (Non-resident) Account (FCNR A/c)

c) Non-resident (Ordinary) Rupee Account (NRO A/c)

3.2 Salient Features of NRI bank accounts

The salient features of the NRI bank accounts are: -

a) (Non-Resident (External) Rupee Account) NRER A/c - As the title itself

indicates this is a rupee account for savings, current or fixed deposits.

Joint accounts in the names of two or more non residents are permitted provided

i) all the account holders are persons of Indian nationality or origin and

ii) the account holders are resident either in the same country or in different countries,
other than the USSR, Poland, East Germany (GDR), Czechoslovakia and Romania
which are classified as Bilateral Group countries. Those NRIs resident in such
Communist countries may open NRE accounts in non-convertible rupees.

25
The account holder shall furnish an undertaking that he will intimate the bank no
sooner he returns to India for permanent residence. The NRE A/c may be freely
operated by the NRI. Apart from foreign remittances arranged by the NRI income
from the account holder's investments from the funds in this account may also be
credited to the account except in cases where the investments have been permitted on
non-repatriation basis.

The WRI may grant a power of attorney to any resident in India to operate the account
for him. However, in such cases only withdrawals for local payments are allowed.

The NRE account has the following advantages: -

i) term deposits for one year and above carry interest at. rates above the rates payable
on domestic deposits of comparable maturities (thus a deposit for 5 years and above
will fetch interest at 13X p.a. as against 1 0% paid on a domestic deposit for the same
term).

ii) the interest on deposits as well as any other income %accruing on the balances in
the account is free of Indian income tax;

iii) the account is free from Indian Wealth tax;

iv) gifts made to close relatives in India from credits in the account are free of Indian
Gift tax;

v) the entire credit balance can be repatriated outside India at any time without
reference to the RBI;

vi) local disbursements from the account may be made freely;

vii) Central and State Govt. securities. National Plan/Savings Certificates and Units
of the Unit Trust of India (UTI) may be purchased freely from amounts standing to
the credit of the account; similarly, sale proceeds of all such securities purchased from
these funds may also be credited to the account without reference to the RBI.

26
b) (Foreign Currency Non-Resident Account) FCNR A/c - This account is
maintained only as a fixed deposit in certain specified foreign currencies v I z. Pound
Sterling, U.S. Dollars, Deutsche Mark and Japanese Yen. Remittances into the
account are converted into one of these foreign currencies chosen by the account
holder. Funds in the account are freely repatriable under the account holder's
instructions without prior reference to the RBI. FCNR deposits may be held for a
maximum of 3 years only. The rate of interest payable on these accounts is determined
and regulated from time to time by the Reserve Bank of India. These rates are higher
than those quoted in the, international markets on deposits of comparable maturities.
The account holders enjoy all other facilities and tax benefits available to the NRI
accounts. They are also fully protected against the risk of any loss arising from
fluctuations in the rates of exchange between the Rupee and the specified foreign
currency. A specimen form for opening an FCNR A/c is placed at Appendix II.

c) (Non-Resident Ordinary Accounts) NRO A/c - The bank account of any Indian
citizen or person of Indian origin proceeding to any country, other than Nepal and
Bhutan, for permanent or indefinite stay abroad is designated as a Non-resident
(ordinary) Rupee A/c. The account can also be opened in rupees with funds remitted
from abroad and can be in the form of a savings, current or fixed deposit account. The
account may be opened by a non-resident jointly with a close resident relative in India
and the latter can operate it freely. Funds in this account cannot be remitted abroad to
the NRI or transferred to his NRE or FCNR Account without the RBI's prior
permission. Interest on the deposits in this account is not exempt from Indian Income
tax. Withdrawals from these accounts can be freely made for local disbursements,
except booking of passages, as well as for investments in Units of the UTI and
Government Securities and National Plan/Savings certificates. With prior RBI
permission the monies may also be used for booking passages of the account holder
and his family to and from India as well as within India. Likewise credits to the

27
account, above certain ceilings, require RBI permission. Credits to the account not
requiring RBI permission are foreign inward remittances, dividend and interest earned
on shares/securities acquired with RBI permission (wherever necessary) and held in
India by the account holder, sale/maturity proceeds of shares/securities and proceeds
of cheques for small amounts up to certain Limits.

3.3 Nomination Facility

Under the Banking Companies (Nomination) Rules, 1985, banks can accept
nominations for existing as well as new accounts from account holders. In the case of
FCNR and NRE accounts, the deceased account holder's nominees (who could be
Indian residents) will not be automatically entitled to the right of repatriation of funds
acquired by them. They will have to apply to the RBI for permission. Ordinarily,
utilization of the funds in - India by the nominees will be freely permitted. The forms
prescribed under the Nomination Rules are DAI for nomination, DA2 for cancellation
and DA 3 for variation.

3.4 Foreign Inward Remittances Payment System (FIRPS)

This is a system under which banks in India convert into rupees the foreign currency
remittances received from abroad by TT/MT/Pay orders in favor of resident Indians
and/or for credit of the remitter's accounts. Payment of the proceeds of such
remittances to the beneficiaries by issue of FIRPS instruments is also arranged without
delay or extra cost.

The FIRPS instrument is issued up to a maximum amount of- R s . 10,000 and is valid
for a period of three months. It is encashable at par at all branches of authorized dealers
in foreign exchange in India.

28
 CHAPTER – 4 AVENUES OF INVESTMENT IN INDIA

4.1 Types of investment.

Non-resident Indians and persons of Indian origin have several avenues of investment
in India. Their funds, whether brought into the country through normal banking
channels or lying in their non-resident accounts, can be invested in Govt. securities.
Units of the UTI, proprietory and partnership concerns, in shares and debentures of
limited companies, company deposits and immoveable property.

Such investment may be with or without repatriation rights for non-repatriable

investments the NRI is required to furnish a non-repatriation undertaking as per the
specimen in Appendix III.

The schemes of investment as detailed below with the exception of investment in

National Plan/Savings Certificates and Proprietory/ Partnership concerns have been
extended to overseas companies, partnership firms, societies, trusts and other
corporate bodies owned to the extent of at least 60X either directly or indirectly but
ultimately by persons of Indian nationality or origin resident abroad. All such eligible
entities desiring to make investments in India should submit a certificate to the RBI
in the prescribed form OAC / OACI , as the case may be (Appendices IV &.V), forties
an overseas auditor/Chartered Accountant/Certified Public Accountant along with
their applications for investment in India. They are also required to submit such
certificates to banks in India with whom they intend to open NRE, FCNR or NRO
bank accounts.

4-1.1 Govt. Securities and Units

Investment in Units under the 1964 Scheme of the UTI, Govt, securities. Capital
Investment Bonds and National Savings Certificates is freely allowed, subject to
monetary limits, if any, under each of these schemes of investment. The investments
may be made by either effecting remittances from abroad or by withdrawals from non-

29
resident bank accounts maintained in India. Authorised Dealers in foreign exchange
are permitted to credit the dividend/interest/sale/maturity proceeds of these
Units/Securities to the NRI's NRQ account where the investments are held on non-
repatriation basis.

Where the investments made are held on repatriation basis, the interest/dividend
therefrom as well as the sale/maturity proceeds thereof may even be remitted outside
India or credited to the NRI's NRE A/c with RBI's prior permission, which is granted
freely,

4.1.2 Investment in proprietory/partnership firms

The NRI may invest up to any extent in proprietory / partnership firms engaged in any
business except real estate, that is, investment in land and immoveable property for
commercial purposes with a view to making profits or deriving income therefrom, and
agricultural/plantation activities- There is no obligation on the NRI to associate any
resident investor as partner. Such investment is subject to RBI permission for which
an application should be made in form FIN (Appendix VI) by the proprietory /
partnership firm. The NRI is required to give an undertaking that neither the capital
invested nor any income earned thereon will be repatriated at any time.

4-1.3 Shares/debenture of companies through the Stock Exchange (port-folio

investment)

The NRI desiring to make portfolio investments should authorise a bank in India to
whom. General permission will be granted by the Ri5I to undertake purchases and
sales of shares/debentures on his behalf. Application for such permission is to be made
in form WRI or R P I, as the case may be, (Appendices VII S< VIII). While authorising
the bank the NRI should specify the name of a share broker through whom the
portfolio investments will be made since the bank cannot directly purchase and sell

30
shares/debentures. Applications from NRI entities for permission to designated banks
for ^ purchasing shares/debentures through Stock exchanges on non-repatriation basis
may be made in form NRC (Appendix IX) while those for purchasing such securities
through the Stock Exchanges on repatriation basis may be made on form RPC
(Appendix X), to the RBI's central office in Bombay.

In respect of portfolio investment on equity shares and convertible debentures the

ceiling for investment, both on repatriation and non-repatriation basis, is, respectively
5% of the total paid-up equity capital of the company and 5% of the total paid-up
value of each series of convertible debentures. Within this ceiling an NRI may hold
equity shares or convertible debentures up to IX of the paid-up equity share capital or
17. of the value of each series of convertible debentures on a repatriation basis. No
ceiling has, however, been prescribed for preference shares, n o n -convertible
debentures and Master in shares of the UTI which can be purchased up to any limit.
The aforesaid ceiling limit of 5/i is monitored by the RBI via the link offices in
Bombay of the designated banks. Portfolio investments may be made in any company,
whether engaged in Industry or Trade. Such investments should however, be held for
a minimum period of one year. The overall ceiling of 5X may be exceeded with the
specific approval of the RBI. Equity shares acquired on conversion of Convertible
Debentures are excluded from the 5% ceiling. As in the case of other investments,
funds for portfolio investments may be either brought into the country through normal
banking channels or taken from the NRI's bank accounts in India.

4.1.3.1 Holding in Joint Names

In cases where shares/debentures are acquired in joint names, the first holder is treated
as investor for operating the one per cent limit for repatriation purposes. The second
or third holder may seek repatriation benefit up to IV. provided he also invests in
shares/debentures of the company either in his sole name or jointly with others with
himself as the first holder.

31
4.1.3.2 Non-FERA Companies becoming FERA companies

An Indian company may, as a result of portfolio investments by NRIs, come to have

a non-resident equity holding exceeding 40%, thus, technically, becoming a FERA
company.

The company concerned should, in such an eventuality, apply to the RBI for a
permission under Sections 26(7), 28, 29and 31 of FERA for doing such acts and things
as are necessary with regard to matters covered by these Sections. Such general
permission is readily granted by the RBI on application. On such permission being
obtained the concerned company is regarded, once again, as a non-FERA company
for all practical purposes.

4.1.4 NRI Bonds

The NRI bond is by far the finest instrument devised by the Government of India to
encourage NRIs returning to India to bring their entire savings back home. The NRI
Bond Issue managed- by SBI Capital Markets Ltd., a subsidiary of the State Bank of
India, opened on November 14, 1938 and was on tap till February 14, 1989. The
following are the main features of these bonds

a) the bonds exclusively meant for NRIs were issued in denominations of $ 500,
$ 1000, $ 5000'and $ 10,000;

b) the bonds have a maturity period of seven years, but they are both encashable and
transferable within this Period.

c) interest on the bonds >2 11.5/4 p. a, will be Compounded half-yearly in dollars and
be paid on maturity, along with the principal in Indian rupees at the rate of exchange
prevailing at that time;

32
d) the bonds are free from Indian income, wealth and gift taxes and these tax
concessions will be available even if the bond holder returns to India before the
maturity of the bond. These tax advantages will also be available to the transferee's
survivors and donors - in fact the halo of total tax exemption will exist as long as the
bond exists, whoever may be the holder. A provision to this effect has been included
in the Direct Tax Laws (Amendment) Act, 1989, which has been passed recently. The
tax benefits will cease upon encashment of the bond;

e) NRI bonds are issued as promissory notes. They can, therefore, be sold and easily
transferred simply by endorsement, delivery and registration. The transfer does not
require any clearance from any authority.

f) rupee loans @ 13.5% p.a. may be raised to the extent of 75% of the face value of
the bond for investments or other bonafide requirements of the bond holder in India
as per. RBI's A.D. (M.A. series) Circular No. 2 dt:17.2.89 to authorised dealers in
foreign exchange. For the NRI who does not intend returning to India in the forseeable
future, the NRI bond is a means of investment planning because it offers the? bond
holder various choices in the matter of use of the funds India on maturity of the bonds
- gifts to near and dear ones, seed money for a project to be taken up in India, donations
for phi 1anthrophic causes, investment in real estate, etc.

In the USA one gets a return of just 8 .66% per annum on a three year deposit which
is, further, subject to fluctuation on a weekly basis. In Japan, Germany, France and
other developed European countries the return is much less. Comparatively, therefore,
the return of 11.5% p.a., compounded half yearly and accumulated in dollars, on the
WRI bonds, is, by any standards, excellent. The continuance of the tax; exemption
even after the NRI becomes a resident in India, and the conversion of the bonds into
Indian rupees at the rate of exchange prevailing on the day of maturity, are two facets
of the scheme that make it superior to any comparable financial investment issued by
any government in the world.

33
 SCHEME CURR INT. PIAYAB CUMULATI US$ 10 REPATRIA
ENCY P.A. LE VE/ NON- 00 TION
CUM. AFTER RIGHT
7
YEAR
IN
INR.
NRE FD INR 13% Qtly. BOTH 35,750 Available
FCNR FD PONDS 12% Qtly. BOTH 33,404 Do
FCNR FD US$ 10.5% Qtly. BOTH 30,161 Do
NRI US$ 11.5% HLY. annually or 31,936 Not avbl.
BOND cumulatively
at bond
holder's
option.

Rates of interest as per RBI Press Release 19S8-B9/164 dated 3.12.SB, effective
5.12.88. The total subscriptions to the NRI Bond Issue were around US$ 75 million.
Responses to the Issue by way of subscription, came mostly from the U.S.A., Saudi
Arabia and Kuwait.

4.1.5 Subscription to the Memorandum & Articles of Association of Indian

Companies

NRIs have been permitted by the RBI to subscribe to the Memorandum and Articles
of Association of any Indian company proposed to be set up for any industrial activity.
The total face value of the shares subscribed for in this manner by the NRI should not
exceed Rs.10,000/-. The Indian company should hold a letter of intent/industrial
licence /certificate of registration issued by the Union Ministry of Industry or Director
General of Technical Development or any other Central or State Government
authority for undertaking 30 / its industrial activities. The company should file a
declaration in form DSS (Appendix XI) with the RBI within 90 days of its
incorporation, giving full details of the shares acquired by the NRI(s).

34
4.1.6 New issues of limited companies (Non-repatriable)

Subject to furnishing a non-repatriation undertaking, the NR I may subscribe freely

(upto 100%.) to the new issues of shares/debentures of any public or private limited
company engaged in any business activity except real estate business. As in the case
of partnership firms, there is no obligation on the investee company to associate' any
resident Indian in the equity/preference capital of the company at any time. Any Indian
company proposing to issue shares or debentures to NRIs should apply in form "ISD"
(Appendix XII) to the office of the RBI under whose jurisdiction its Registered Office
is situated (Appendix XIII) together with
a) a non-repatriation undertaking from each NRI
b) bank certificates in support of consideration received by remittance from abroad or
out of funds held in the NRE/FCNR/NRO Accounts of the NRIs;
c) copy of Memorandum and Articles of Association;
d) latest balance sheet and profit and loss account;
e) where equity shares are to be issued to overseas companies/firms/societies/trusts or
other corporate bodies owned directly/indirectly but ultimately by non- resident
individuals of Indian nationality or origin, a certificate in form "OAC/OAC-i" from
an overseas auditor/chartered accountant/certified public accountant indicating
ownership/beneficial interest in the investing entity; f) photocopy of consent order of
the Controller of Capital Issues (CCI) if the total capital to be raised during a period
of one year exceeds Rs. 1 crore.
The NRIs themselves need not seek permission from the RBI for such investment
separately.
Sometimes the NRI, for reasons of succession, survivorship etc., holds the
shares/debentures jointly with his close resident relative/s in India. On such joint
holdings, the RBI will permit repatriation benefits provided;

35
a) the investment is made out of funds received from abroad or held in the NRI's NRE
or FCMR A/c;
b) the first holder is the NRI himself and
c) the resident holder is closely related to the non- resident investor.
The facility of remittance/repatriation of capital/dividend will be allowed to the NRI
(first holder) only. The resident holder will not be entitled to such facility when he /
she inherits the shares-debentures.

4.1.7 New issues of Indian companies under the 40%scheme (Repatriable)

Under this scheme the NRI may invest upto 40% with repatriation rights in new issues
of shares-or convertible debentures of any new or existing non-FERA company
raising capital by means of a public issue through a prospectus. The investment will
be permitted only in companies raising capital for setting up new
industrial/manufacturing projects or for expansion / diversification of existing
industrial / manufacturing activities. Investment under this scheme may also be made
in hospital projects, in the hotel industry (three star hotels and above) and new or
existing companies engaged in the activities of shipping, development of computer
software and oil exploration services. Where capital is raised otherwise than through
a prospectus, the ceiling for NRI investment will be Rs. 40 lakhs. There is, however,
no such monetary ceiling in the case of new issues of private limited companies.
RBI's approval for issue of shares to NRIs under this scheme should be sought by the
company concerned by submitting form ISD. The form ISD shall be supported by the
following particulars/documents for speedy clearance of the share issue proposal:
a) details of company's capital structure;
b) details of industrial/manufacturing activity undertaken/proposed to be undertaken;
c) certified copy of industrial licence, if any;

36
d) list (ih duplicate) of the prospective non-resident investors, indicating name,
nationality, country of birth/origin 5 country of residence of each investor, number
and value of the shares and the manner in which subscription will be paid (i.e. by
inward remittance from abroad or out of funds held in NRE/FCWR Account;)
e) all other documents as per items (b) to (f) in (iv) supra;
The application for setting up a hotel project should be supported by a letter from the
Dept. of Tourism,' Government of India, clearing the project and defining the grade
of the hotel. No separate application is required from the NRI investors.

4.1.8 Investment in priority industries under 747.Scheme (Repatriable)

The Govt. of India (Ministry of Industry) operates a scheme for encouraging NRIs to
invest in priority industries in India. Under this scheme investment in
shares/convertible debentures up to 747. can be made on repatriation basis for starting
industries listed in Appendix I, of the Industrial . Licensing Policy 1973 (Appendix
XIV). Investment will also be allowed in any other industry provided the investor
gives an export obligation for 60% of the output (75% in the case of Small Scale Units).
Investment under this scheme will also be permitted in hospital projects and in the
hotel industry (3 star and above).
Applications for investment should be made to the Secretariat for Industrial Approvals
(SIA) Ministry of Industry, Govt, of India, New Delhi. After securing Central Govt,
approval for investment by NRIs, the company concerned should apply to the RBI in
form ISD with a photocopy of this approval for permission to issue shares/debentures
to the NKIs. The other documents to be forwarded to the RBI with the form ISD are
those listed in (iv) supra, items (b) to (f).

37
If the investment under this scheme is to be made by a partnership firm the following
particulars should be furnished to the RBI in addition to submitting form ISD:
a) name, address and nationality of each non resident partner;
b) quantum of capital to be contributed by each one of them; and
c) profit sharing ratio.
A copy of the partnership deed shall also be submitted.

4.1.8.1 Overseas Agents

The RBI permits Indian companies, on application, to appoint overseas agents on

commission basis to secure direct investments in new issues of shares and debentures
from NRIs and persons of Indian origin settled abroad.

4.1.9 Investment in existing sick companies (Repatriable)

To encourage NRI participation in the revival of sick companies, the government have
recently decided to permit NRI to invest in such units up to 100'/. on a repatriable
basis. The following are the Government's guidelines in this regard;-

a) Bulk investment by NRIs on private placement basis would be allowed in sick

companies.

b) A company will be considered "sick" only it a public financial institution or a

consortium is already formulating a plan for its rehabilitation/revival or the company
is consistently showing losses for the last three years or the market price of its shares
is below par for two years and the public financial institutions/banks are satisfied in
this regard.

c) The bulk investment by the NRI’s can be either in the form of sale of shares to them
or by issue of fresh capital .

38
d) Investment on repatriation basis up to 100/1 of the equity capital of the company
can be permitted provided a request is made by the Indian company and supported by
a Special Resolution from the shareholders.

e) Repatriation of original capital brought into India for a sick company will be
permitted after a minimum period of five years. The clearance will be given on a case-
by-case examination and the future payment liabilities would be specifically taken
into account while processing these cases,

f) RBI will adopt normal procedures to satisfy itself that the intending NRI investors
are non-residents of Indian origin or corporate entities which are predominantly
owned by NRIs.

The concerned Indian company should apply to the RBI, Exchange Control Dept,
Bombay in form RSU (Appendix XV) with the documents specified in that form.

4.1.10 .Immoveable property

NRIs can acquire residential property in India for their bonafide use subject to local
laws and without RBI permission. Persons of Indian origin holding foreign passports,
however, require RBI permission for such investments. Normally only one residential
property will be permitted to be acquired by foreign nationals of Indian origin residing
abroad. The form prescribed for application to the RBI is form IPI.I (Appendix XVI).
Before granting permission the RBI should be satisfied about the reasonableness of
the valuation of the property; also that the purchase price is paid out of funds remitted
from abroad or held in the purchaser's bank account in India. The applicant should,
further, undertake that he will not seek repatriation of the sale proceeds of the property,
if sold at a later date, or the income accruing on it, outside India. RBI permission is
also required for any sale, mortgage, lease for periods exceeding five years, gift or the
settlement of such immoveable property acquired in India.

39
NRI having immovable property in India may open NRO Accounts jointly with their
close relatives in India for depositing rental and making payments towards taxes 'and
upkeep of the property.

4.1.11 Company Deposits

NRIs are permitted to place funds with public limited companies in India, including
Government undertakings, with full repatriation benefits, provided;-

a) the deposits are made in conformity with the prevailing rules and within the limits
prescribed for acceptance of deposits by such corporate bodies;

b) the funds are procured either by remittance from abroador from the NRE/FCNR
A/c of the NRI; and

c) the deposit is kept for a period of 3 years

Where such deposits are on non-repatriation basis the funds lying in the NRI's NRO
A/c may be used and deposits may be placed with private limited companies as well.

The limit upto which a company incorporated under the Companies Act, 1956, (except
a small scale unit) is permitted to accept deposits is 25% of the paid-up capital and
free reserves of the company. Additionally, deposits up to 10'/. of the paid-up capital
and free reserves of the company may be accepted from the company's shareholders.

The company proposing to accept deposits from NRIs, whether on repatriation or non-
repatriation basis, should submit an application to the RBI giving details of its Deposit
Scheme. The NRIs need not seek separate permission in such cases,

40
4.2 NRI Funds Inflow
The liberalisation of exchange control and tax; provisions in regard to NRI
investments since 1982 and the attractive rate of interest offered by banks on term
deposits in the NRE and FCNR bank accounts have succeeded to some extent in
mopping up NRI funds. Bank deposits were a phenomenal Rs.10,170 crores as at the
end of March 1983 as against Rs. 553 crores and Rs.242 crores respectively during
19B2/S3 and 1981/32. However, direct and portfolio investments by NRIs have not
shown any significant improvement. NRI investment under the direct investment
schemes amounted to Rs. l264 crores only as at the end of March 1988. Portfolio
investment as on 31/3/88was just Rs. 66 crores. This included Rs. 22 crores invested
by certain off shore investment companies in the shares of a leading company in
Bombay.

4.3 Assistance from The Indian Investment Centre, State

Government Agencies and Banks

4-3.1 The Indian Investment Centre and State Government Agencies

The Indian Investment Centre (IIC) has been set up by the Government of India to
promote foreign private investment in the country. The Centre has its headquarters at
New Delhi and overseas offices at Abu Dhabi, Frankfurt, London, New York,
Singapore and Tokyo. The organisation renders advice and assistance to non-resident
investors on setting up industrial projects in India. NRIs can make use of this facility.

Many State Governments, notably the Governments of Maharashtra and Gujarat, have
also established nodal agencies or NRI Cells to facilitate clearances required from
various State level authorities for services such assecuring industrial plots,
construction of factories, supply of electricity, power and water etc.

41
4.3.2 Banks

In Bombay two banks viz. State Bank of India and Citibank have branches exclusively
for NRIs. The State Bank of India has set up an NRI desk in each of its 40 overseas
branches. Citibank also has NRI desks in Hongkong, Singapore and New York. UCO
bank has opened a merchant banking and NRI bureau in Bombay- Canara bank has
NRI cells in centres like Goa, Mangalore and Cochin.

4.3.2.1 Credit Cards for NRIs

The Andhra Bank has introduced special Visa Credit cards for NRIs holding Indian
passports. These can be utilised by the IMRIs while on visits to India for purchase of
goods and services at over 7000 merchant establishments enrolled by the Andhra Bank.
NRIs can also draw cash advances at over 900 branches of the bank to meet emergency
requirements. All the credit utilisations are debitable to the card holder's NRO or NRE
account. The scheme has been approved by RBI, initially, for a period of 1 year, upto
30/6/89.

4.4 Facilities for Returning Indians

NRIs desiring to return in India for securing suitable employment, or for exploring
possibilities of setting up small scale industrial units in India, or for any other
exploratory purposes may return to India; yet they may be permitted to hold their
foreign currency assets abroad for a period upto five years, subject to their compliance
to the terms specified by the RBI. Returning NRIs could avail themselves of the
'Returning Indian Foreign Exchange Entitlement Scheme' (RIFEE Scheme). Under
this scheme an NRI can avail himself of foreign exchange upto 50 per cent of the total
amount of foreign exchange repatriated into India, and balance held in this
NRER/FCNR account at the time of trasfer of residence.

42
Foreign exchange against this entitlement can be availed of by such persons for
themselves or their dependents for specified purposes which include travel abroad,
medical treatment abroad, foreign education, gift remittances to a close relative on
special occasions, import of special appliances for professional use subject to
compliance with import licensing formalities, and the premium on foreign currency
life insurance polices. Such benefits could be availed of for a period of 15 years
reckoned from the date of return of the head of the family to India for permanent stay.

4.5 Facilities to NRIs Under EXIY Policy

In terms of the Import and Export Policy 1988-1991 (EXIM Policy), NRIs are given
certain special facilities in the matter of import of capital goods, raw materials,
components, consumables and spares for setting up new industrial units, for
participation in expansion or diversification of an existing unit. The entire foreign
exchange involved in the import is to be provided by the NRI out of foreign exchange
earnings and resources abroad on non-repatriable basis.

To expedite decision making and clearance of NRI proposals, a 'Special Approval

Committee (SAC) for NRIs' has been set up in the Department of Industrial
Development (DID). The import of capital goods by NRIs has been exempted from
the advertisement procedure for capital goods. NRIs are allowed to enjoy import
facilities to set up amusement parks in India. Such imports have to be fully financed
out of NRI's own foreign exchange earnings and resources abroad, and have to be
undertaken without repatriation benefits.

NRIs returning to India for permanent settlement are allowed to import professional
equipment and office machinery which have been used by them abroad for at least one
year prior to their return to India. They are also allowed to import computers and
computer based system without any restriction on the minimum configuration. NRIs

43
could also avail themselves of import commissions in terms of special scheme for
electronics industry. Import of raw materials, components, consumables and spares
for setting up of new industry by NRIs could be allowed for a period of the first three
years (subject to a maximum of Rs.5 lakhs in value each year).

SBI Bond II Issue

Since the SBI's first series of NRI bonds issued in 1988 attracted investment to the
tune of about 92 million US dollars, it has received clearance from the GO1 for issuing
'US dollar denominated NRI bonds' for NRIs for a second time, and is expected to
raise 200 million dollars.

The bonds will have a maturity of seven years with the interest rate one per cent above
the rate applicable to three year FCNR US dollar deposits in India prevailing as on the
opening date of the issue. This scheme offers a long term instrument where the interest
and principal would be totally exempt from income and wealth taxes, even if the
bondholder returns to India permanently.

Also the scheme offers both cumulative and noncumulative payment of interest. In the
case of cumulative bonds, interest calculated in dollars would be compounded half-
yearly and paid on maturity. The maturity proceeds and periodical interest would be
paid in non-conatriable Indian rupees, after applying the prevailing dollar-rupee
exchange rate.

Subscription to the issue which is being managed by the SBI Capital Markets Limited
is open only to individual NRIs. The investment can be made either by fresh
remittances, or balances held in FCNR or NRER or FCNR Special Deposit Scheme
introduced for Gulf NRIs.

44
Special Deposit Scheme for Gulf NRIs

The RBI has launched a new scheme called Special Deposit Scheme for the benefit of
NRIs in West Asian countries. This was the follow-up to the repeated requests by
NRIs from the West Asia, pleading for the introduction of FCNR account scheme with
facility of withdrawal of full or part of the sum deposited without notice, and providing
exchange protection to the depositor.

Accordingly, FCNR special deposit scheme (FCNR SDS) for the West Asia has been
designed with the following salient features. The scheme is open to NRIs as well as
OCBs owned by Indians resident in the West Asia; deposits would be designated
under the scheme in US $ only and they could be placed with designated branches of
any authorised dealer in India.

Under this scheme, the deposit mid be open-ended in terms of the period; there would
not be a definite term. Accounts under the scheme could be opened, provided, funds
for the purpose are transferred to India in an approved manner from the country of
residence of the prospective account holder, or from any other foreign country in the
external group.

The scheme also provides for withdrawal fully or partially of the balances by means
of instructions conveyed to the bank. No interest would be payable on balances
standing to the credit of the accounts maintained under the scheme.

The exemptions-in regard to wealth tax and gift tax as applicable to balance under the
existing FCNR scheme would alsa be applicable to balances held under this scheme.
The scheme has come into effect from August 21, 1990.

45
4.6 Incentives and Concessions to NRI
4.6.1 Tax Incentives to NRI Investors Under Income Tax Act (ITA)

For individual NRI investors, total exemption from income-tax is available on the
following incomes:

a. Interest income from NRER account

b. Interest income from FCNR account

c. Interest income from the NRI Bonds

d. Interest income from NSCs and other specified Government Securities

e. Dividend income from units of UTI

f. Any other income from investments, in foreign exchange, except real estate.

Such exemption is available, provided, the investments have been made by remittance
of funds from abroad or through NRER/FCNR account.

There are special provisions relating to certain incomes of NRIs introduced in the ITA
which could be availed by NRIs at their option. In terms of these special Provisions,
in the case of NRIs, the investment income and income by way of long-term capital
gains derived from any Foreign Exchange asset is to be taxed at a flat rate of 20 per
cent. Other income of an NRI will be treated as an altogether separate block and
charged to tax in accordance with other provisions of the ITA.

In the case of an NRI who becomes a resident in India in a subsequent year, the special
provisions of taxation at flat rate would continue to apply in relation to the income
derived from certain foreign exchange assets which presently covers all specified
assets except shares in Indian companies. Thus income from shares in Indian
Companies by way of dividends as well as long-term capital gains on this account will
be taxed as income as per other provisions of the ITA. For income from the other
specified assets the special provisions would continue to apply until transfer or
realization into money of such assets.

46
4.6.2. Tax Incentives Under Wealth-Tax Act (WTA)

Incomes derived out of specified foreign exchange assets are also exempted from
WTA. In order to avail himself of this exemption an NRI should not be resident in
India within the meaning of the ITA during the year ending on the relevant valuation
date. Balances standing to the credit of an NRI in the NRER and FCNR accounts are
exempted from wealth-tax if such a person is an NRI under FERA though he may be
a resident under ITA.

Investment in units of UTI by NRIs through remittances from abroad or from their
NRER/FCNR account is totally exempted from wealth-tax.

In respect of NRIs who return to India for permanent residence, money and the value
of assets brought by him into India and the value of assets acquired by him out of such
money within one year immediately preceding the date of his return or at anytime
thereafter will be considered as exempt from wealth-tax. This exemption will be for a
period of seven successive assessment years commencing from the next assessment
year following the date on which such a person returns to India. It has been clarified
that the balance in NRER account and FCNR account as on the date of return of the
NRI will be considered for exemption from wealth-tax for seven successive
assessment years. Exemption is also available to NRIs for investments made in
specified companies by way of contribution to initial issues of capital made by such
companies.

47
 CHAPTER -5 Evolution of Liberalization Policies

5.1 Introduction
The present investment opportunities and the relative benefits available to NRIs have
been discussed in the previous section. The liberalization policy of the GOI and the
RBI on the NRI investments is discussed briefly in this section. With a view to
attracting remittances from NRIs, the then Union Finance Minister announced in the
Budget speech for 1982-83 liberalized facilities in regard to bank deposits and
investment in equity shares of the corporate sector. Subsequently, in July and August
1982, these facilities were further liberalized and extended to cover preference shares
and debentures issued by Indian companies. Concurrently, the RBI simplified the
exchange control procedural formalities to facilitate such investments.

Hitherto, the facilities available for deposits in non-resident accounts and investments
in shares of Indian companies were confined to non-resident individuals of Indian
nationality or origin. The entire gamut of the liberalized facilities has been extended
to OCBs (overseas companies, partnership firms, trusts, societies and other corporate
bodies) in which at least 60 per cent of ownership/beneficial interest is rested in non-
resident individuals of Indian nationality or origin. Further, the equity shares allotted
on concession would be, in addition to the shares of the concerned company,
purchased through stock exchange up to the limit of one per cent of the paid-up equity
capital. No limit either on quantum or on value is stipulated in regard to purchase of
non-convertible debentures.

Apart from the purchase of shares and debentures through stock exchange, NRIs
including OCBs owned by them are now permitted to invest, with repatriation benefits,
in the capital raised by any new or existing company (other than a FERA company)
through new issues of equity/preference shares and convertible and non-convertible
debentures without any monetary limit. However, in the case of new issues of shares

48
and convertible debentures through prospectuses, NRIs and corporate entities allowed
to invest up to 40 per cent of the new capital raised. They have also been permitted to
invest in the capital raised, other than through prospectus, up to 40 per cent of the new
issues of shares and convertible debentures of any company (public or private limited),
subject to a quantitative ceiling of Rs. 40 lakhs.

The liberalized facility of direct investment by NRIs is confined only to capital raised
by Indian companies for setting up new industrial projects or for
expansion/diversification of existing industrial undertakings. However, with the
abolition of the list of industries which was hitherto not open for direct investment by
non-residents, and with the addition of the hotel industry, the scope for investment by
NRIs has now been widened. The facility of NRI investment up to 74 per cent in equity
capital raised by companies partnership firms engaged in priority industries has also
been extended to direct investment in new issues of convertible debentures, preference
shares; it covers investment in hotels with at least three star rating.

The GOI has permitted equity share holding of foreign investors to be maintained at
a level of 51 per cent or below, i.e., the same level of foreign equity which the foreign
majority companies have been allowed to retain under FERA even when there is a
likelihood of its reduction as, a result of the exercise of the 'convertibility clause'
option by financial institutions. This is, however, subject to two provisions, viz., (1)
the foreign shareholders bring in the required foreign exchange in cash to acquire the
shares at about the Market price to maintain the stipulated level of foreign equity
holding and (ii) the required special resolution under section 81 of the companies Act,
1956 is passed.

49
5.2 Liberalization of Tax Provisions
Following liberalization in the facilities for portfolio and direct investment made
available to NRIs in the Budget for 1982-83, the GOI modified in the Budget for 1983-
84 also, the tax provisions applicable to NRIs, other than companies, with a view to
augmenting the flow of their remittances into selected financial assets in India.

The assets specified in this regard are:

(i) shares in Indian companies,

(ii) debentures issued by and deposits with public limited companies,
(iii) securities issued by the Union Government and
(iv) units of UTI.

The Union Government may specify by notification in the Official Gazette. Any other
assets, which would be subject to modified tax provisions. Under the new provisions,
investment income derived by an NRI from the specified investments and long-term
capital gains arising out of transfer of these assets would be charged to income tax at
a flat rate of 20 per cent plus surcharge of 12.5 per cent of such income-tax. The
investment income arising from these assets as also long-term capital gains would be
treated as a separate block and not aggregated for tax Purposes with any other income.

Further, if an NRI's income consists only of investment income and long-term capital
gains no flat rate should apply to him. In cases where such an option is exercised by
an NRI, the whole of this total income would be charged to tax under the general
provisions of the ITA. The budget also envisaged that the long-term capital gains
arising from the transfer of any foreign exchange assets are exempted from tax if

(a) the net proceeds realised are reinvested or deposited by the NRI within six months
in any other specified asset or in an NRER account in any bank in India or in savings
certificates notified by the Government and

(b) the new assets including any deposit acquired are held for a minimum period of
three years from the date of acquisition.

50
The budget also provided for an exemption from wealth tax of the value of foreign
exchange assets acquired and held by NRIs. Also gifts of foreign exchange assets by
NRIs to their relatives in India would be exempt from Gift tax. An additional interest
of one per cent on investments by NRIs in the Six-Year NSCs would be paid to them,
provided, subscriptions for these certificates are received in foreign exchange.

5.2.1. Facilities for Investment in Company Deposits

NRIs were also permitted to place funds with Public limited companies (including
Government undertakings with limited liability) in India, with full repatriation
benefits, if deposits were made for a period of three years and certain other conditions
were fulfilled. This facility was also extended to OCBs. As regards investment by
NRIs and OCBs in the Government Securities including Six-Year NCSs, the RBI had
clarified that investments on a repatriation basis, in certain certificates and securities
like NCS VI and VII issues, can be made only by NRIs and not by OCBs
predominantly owned by them. However, these institutions are allowed to invest in
certain other types of certificates like NSC I1 issue, subject to certain monetary
limits.20

Direct investment in new issues with full repatriation benefits, under 40 per cent and
74 per cent schemes, has been permitted to be made in hospitals as well. With a view
to promoting investment by NRIs and OCBs owned by them in new issues of, shares
and debentures under the direct investment schemes, the RBI decided to permit Indian
companies to appoint agents abroad for securing such investments; they would pay
compensation upto a reasonable extent on the basis of the quantum of investment
actually made through the agents.21

20
Axel Dreher, Peter Nunnenkamp, Krishna ChaitanyaVadlamannati, (2013). The Role of Country-of-Origin
Characteristics for Foreign Direct Investment and Technical Cooperation in Post-Reform India,World Development,
21
Chandra, Mahesh and Shukla, D.C., Income Tax Law and Practice, PragatiPublication, New Delhi, 2013

51
With a view to facilitating expeditious repatriation of sale proceeds of investments
made by NRIs, the designated banks can now immediately repatriate such funds with
the permission of the RBI, even without production of no objection certificate/tax
clearance certificates. However, the repatriable amounts are confined to the cost of
acquisition of investments sold or the actual sale proceeds realised, whichever is
lower; the balance amount, if any, is allowed to be repatriated on receipt of the relevant
tax certificates. As regards the portfolio investment by NRIs in equity shares on a
repatriation basis, the RBI stipulated that such investments would have to be held for
a minimum period of one year before the sale proceeds of such shares were permitted
to be repatriated.

5.3. Liberalization to Portfolio Investments

In May, 1983, relaxations granted to NRI investments were subjected to a specific
limit. An overall ceiling of (a) 5 per cent of the value of the total paid-up equity of the
company concerned and (b) 5 per cent of the paid-up value of each series of
convertible debentures was fixed on purchase of equity shares and convertible
debentures, through stock exchanges, on repatriation and non-repatriation bases. The
limit is applicable in relation to all such purchases, taken together by all categories of
NRI investors, viz., non-resident individuals of Indian nationality or origin, overseas
companies, partnership firms, societies and other OCBs owned by such persons, but
separately for (a) equity shares and (b) convertible debenture series.22

The equity shares acquired on conversion of debentures will not be included in the 5
per cent ceiling. Designated banks have been permitted to purchase on behalf of NRI
investors upto this overall limit, without the specific approval of the RBI for each
transaction. Any purchase of equity shares and convertible debentures in excess of
this limit will require the prior and specific approval of the RBI.

22
Darst, D. M. (Ed.). (2015). Investing Background. In Portfolio Investment Opportunities in India,

52
 5.3.1. Abolition of Estate Duty

In the Budget for 1985-86, the GO1 abolished the Estate Duty which was considered
one of the major hurdles in the way of inward remittances to India by NHIs. Further,
the abolition of surcharge on income-tax introduced in the Budget would result in an
effective reduction in the flat rate of income-tax from 22.5 to 20 per cent; this in turn
is expected to attract investments in debentures and shares of Indian companies and
company deposits by NRIs.

5.3.2. Special Provisions to Authorised Dealers

The liberal policy for encouraging portfolio and direct investment by NRIs and OCBs
was continued during the year 1985-86 also. Previously, NRIs were required to make
application to the RBI for the purpose of sale transfer of their holding of
shares/debentures in listed companies acquired by them with repatriation facilities.
During the year, to expedite the processing of such applications, it was decided that
NRIs could approach an authorised dealer;23 the dealer would obtain permission from
the RBI for sale/transfer, as well as for remitting the sale proceeds, or will credit them
to NRER or FCNR accounts on production of a no objection certificate from the Indian
tax authorities.

5.3.3.Extension of Area of Investments in to New Fields

The policy for encouraging portfolio and direct investment by NRIs was further
liberalized during the year 1986-87. Accordingly, the GO1 announced certain
facilities such as follow.

23
Roberts, M.W., (2004). Globalization, National Autonomy and Non-Resident Indians, Contemporary South Asia

53
a. The extension of the facility of direct investment under 40 per cent scheme by NRIs
to companies engaged in development of computer software and oil explorations.

b. Permission to NRIs to subscribe to the Memorandum and Articles of Association

of a new company.

c. Permission to Indian companies with more than 40 per cent NRI interest to acquire
immovable properties in India, which may be necessary for or incidental to carrying
on their industrial activities on submission of LO1 (Letter of Intent), or IL (Industrial
License), or certificate of Registration (COR) from appropriate Government Authority.
Since July 31, 1986,24 to facilitate prompt remittance of dividends, authorised dealers
have been granted permission for the remittance of dividends to NRI shareholders,
irrespective of the face value of the equity shares, or percentage of the issued equity
capital held by such NRIs, without the prior approval of the RBI in respect of non-
FERA companies. Only applications of FERA companies are required to be submitted
to the RBI.

Further, NRIs have been allowed to invest

i) upto 100 per cent of the equity capital in sick industrial units,

ii) In new issues of Indian shipping companies under the 40 per cent scheme, and

iii)In 'Diagnostic Centre’s in India under "40 per cent scheme" or "74 per cent
scheme."

Besides, it has been decided to remove the quantitative ceiling of Rs.40 lakhs for
making investments in India by NRIs in private limited companies under the "40 Per
cent scheme".

The liberal policy of encouraging direct and portfolio investment by NRIs was
continued during 1987-88 also. In the Budget for 1987-88, the GO1 had announced

24
Shanbhag A N and ShanbhagSandeep (2008).NRI investment and taxation in India Financial Planning Journal
January-March.

54
that income accruing to NRIs on transfer of foreign exchange assets and held by an
NRI for a period of more than three years would be treated as long-term capital gains
and be subject to income tax at the flat rate of 20 per cent.

However, if the NRIs reinvested or deposited the net proceeds realised on transfer of
any foreign exchange asset in any other 'specified asset', or NREH account in any bank
in India, or in savings certificates within six months of transfer, no tax would be levied.
Besides, the Government declared certain facilities such as (a) permission to
authorised dealers to allow repatriation of sale proceeds of shares abroad, or credit
thereof to the NHER account of the sellers after payment of taxes in India, and (b)
extension of permission to consider the applications for grant of rupee loans/overdrafts
to NRIs for investments in India; such investments were to be made against fixed
deposits held in the borrowers NRER/FCNR accounts; one condition was that
investment should not be made in commercial activities, agricultural/rea1 estate
business, predominantly internal trading activities as also in portfolio investments.

5.4.Liberalization in the Period of Stay in India

Section 6 of the ITA was also amended and the maximum number of days of stay in
the country in a year was increased from 90 days to 150 days. The 90-day period was
too short for those who had to supervise investments in India. The then Finance
Minister suggested that section 195 of the ITA would be amended so that deduction
of tax at source should be made only at the time of payment of dues (like interest
income)25, and not when these dues are credited to the accounts of the NRIs.

The Finance Act of 1987 had provided that deduction should be made at the time when
the dues were credited or paid, whichever was earlier. This had adversely affected the
flow of funds from the NRIs into the country.

25
Wanda van Kampen (2012) Money to India Transfer Channels for Remittances in the Guntur Region, Andhra
Pradesh National Institute of Advanced Studies Bangalore, India, April

55
5.5 TREND OF NRI INVESTMENT IN BANK DEPOSITS

Evolution of the investment opportunities available to NRIs and the liberalization

policies of the GOI on NRI investments in India have already been discussed in the
second chapter. This chapter is an attempt to study the impact of exchange rate
variation, and interest rate changes on NRI investment in bank deposits. The analysis
relics upon statistical tools such as percentages, growth rates, standard deviations,
coefficient of variation and standard errors. Trend equation analyses are also made to
find out statistically the significance of the growth rate of deposits. Simple and
multiple correlation analyses, and simple and multiple regression analyses with two
and more variables are also used to bring out the relationship and dependency of
deposits on different variables.

NRI bank deposits along with compounded interest have soared to R6.1,35,000
million by the end of 1988-89, and' have been growing by a whopping 35 per cent a
year. Official figures normally value such deposits at the current exchange rate with
the steady depreciation of the Indian rupee. This would mean that the country's debt
to NRIs is doubling every two to three years. At this rate it could touch Rs.10 lakhs
million by the end of Eighth Plan (1991 to 1996). The interest payment alone on this
would exceed Rs. one lakh million a year. This is more than half of India's export
earnings of the year 1987 to 1988.26

NRI bank deposits, among other sources, constitute 88.5 per cent of the total inflow
from NRIs. About 68 per cent of the foreign exchange reserves are offset by the
liability on account of the hard currency deposits held by NRIs.

26
Bishwajit Bhattacharyya, Direct Tax Reforms and NRIs, Financiai Express, October 5, 1989,

56
The NRER Account Scheme was introduced in February 1970 under which NRIs or
individuals of Indian origin could open deposit accounts designated in rupees. They
can do so at the par value prevalent at the time of deposit, with banks in India by
remitting funds from abroad. The FCNR Account Scheme, which was introduction in
noverber,1975 permit deposits in designated foreign currencies. The initial
remittances may be NRER from abroad, or by conversion of the existing NRER
accounts maintained in rupees with authorised dealer banks. NRIs, irrespective of the
country of residence, are permitted to open the above said two accounts. Such facilities
are also extended to NRIS living in the Bilateral Group Countries, such as, USSR,
Poland, East Germany, Czechoslovakia, Rumania, etc.

The NRI account holders can authorise persons resident in India to operate these
accounts under power of attorney, or other appropriate authority granted by the NRIs.
But such authority should extend only to withdrawals for local payments in India. As
the funds in NRER accounts are fully repatriable, any payments made from such
accounts are considered as equivalent to approved remittance of foreign exchange.

It is gratifying to note that NRER and FCNR accounts are popular among the NRIs,
and the outstanding balances in these accounts have been steadily increasing in recent
years. As at the end of June 1989, the total NRI bank deposits under the NRER and
FCNR accounts amounted to approximately y Its. 15,788 crores. Of these, Its. 5,953
crores were held in NRER accounts, and Rs.9,835 crores in FCNR accounts. 27
However, the economic survey of the GOI does not include these deposits within its
computation of the overall external debt of the country. Under international
conventions, these are also treated as liabilities rather than assets. In a sense, these
deposits are liabilities because they have to be repaid with interest at the time of
maturity, like any other commercial loan. NRI deposits with banks in India are lending
excellent balance of payments support to India's economy at this critical juncture of

27
Banik A., Bhaumik P.K. (2006) Foreign Investment: India. In: Foreign Capital Inflows to China, India and the
Caribbean. Palgrave Macmillan, London.

57
its development. Here, it is attempted to find out the progress of the NRI bank deposits
using appropriate statistical tools.The outstanding balances of NRER and FCNR
deposits over a period of 10 years, i.e., 1979 to 80 to 1988 to 89. A casual look at the
table shows that in the initial years, NRER accounts; attracted greater NRI preference
for example, during 1979 to 80, out of a deposit of Rs .680 crores, the share of the
NERE Account was 77.94 per cent whereas, that of FCNR account was just 26.06 per
cent. This trend continued upto 1984 to 85. It seems that the NRIs have relied upon
FCNR account from 1985 to 86 onwards. For example, during the year 1988 to 89, of
the total deposits of Rs.15,788 crores, FCNR account has won a major share, i.e.,
62.29 per cent, leaving 37.71 per cent to NRER account. The overwhelming response
of the NRIs to FCNR account clearly indicates the fact that they bother much about
the exchange rate variation, and that is why two third of the preference of NRIs is for
FCNR accounts.28

It is clear from the table that out of the total deposits made by NRIs NRER deposits
are in a declining trend to the extent of 37.71 per cent in 1988 to 89 from Year ending
June

28
Shanbhag A N and ShanbhagSandeep (2008). NRI investment and taxation in India Financial Planning Journal
January-March

58
 Table 5.1
Outstanding Balances of
NRER Account and PCNR Account Deposit

Year Deposit Total (2+3)

Ending
FCNR Account
31st March NRER Account
3 4
1
1979-80 2
150.00 680. oo
1980-81 (22.06) (100)
530.00 181 . oo 1118.74
1981-82 (77.94) (16. 18) (100)
937.74 135.00 1394 . 04
1982-83 (83.82) ( 9.68) ( 100)
1259.04 372.00 2051 . 20
1983-84
(90.32) (18. 14) (100)
1984-85 1679.20 706 . oo 2960. 26
(81 .86) (23.85) (100)
1985-86 2254 . 26 3818.57
954.62
(76. 15) (25.00) (100)
1986-87 2863 • 95
2188.22 5649.64
( 75.00 ) (100)
1987-88 (38.73)
3461.42 7847 .31
3511 . 11
1988-89 (61 .27) (44 .74) (100)
4336.20 10054. 13
4947.13
(55 .26) (100)
(49.20)
5107. oo 15788.00
(50. 80) 9835. oo
(100)
(62.29)
5953. oo
(37.71)

(Rs.in Crores)

Source: Compiled from the records of the Indian Investment centre (A Govt. of India
Organization), New Delhi and The Economic Times, New Delhi, Thursday, May 18,
1989. p.6, and compiled from the Annual Reports and Bulletins of the RBI for
several years.

NOTE: Figures in parentheses denote percentages 90.32 per cent in 1981 to 82.
However, the FCNR deposits are in increasing trend to 62.29 per cent in 1988 to 89
from 16.18 per cent in 1981 to 82.

59
The growth rate of NRER deposits from 1979-80 to 1981-82 was 33.43 per cent; but
the same had declined to 21.43 per cent during the period 1982-83 to 1988-89.
However, the overall growth rate for the study period was 27.36 per cent. The main
reason for this declining interest may be depreciation in the money value of the rupee.
To identify the relationship between the NRER deposit and average $ exchange rate,
a simple correlation analysis is made, and the results are presented in table 111.2. It is
found from the table that there is a strong positive correlation between the NRER
deposits and the average $ exchange rate as referred by the correlation value of 0.98.

The growth rate for FCNR deposit was less than zero (-0.03 per cent) the period 1979-
80 to 1981-82 whereas, surprisingly, the growth rate had increased to 70.92 per cent
during the period 1982-83 to 1988-89. This may be mainly due to the changes in the
Government policy on NRI investments in the year 1981-82. Mention may be made
of easy transfer of funds, liberalization in the procedure and increase in the differential
rate of interest up to two per cent. However, the overall growth rate of FCNR deposit
was steadily growing at a rate of 51.94 per cent annually.

60
 CHAPTER – 6 Direct Portfolio Investment By NRIs

6.1. Direct Investment by NRIs

Direct Investment Opportunities

NRIs can invest in India as under:

1. Investment under Automatic Route with repatriation benefits.

2. Investment with Government approval.

3. Other Investments with repatriation benefits.

4. Investments in equity without repatriation benefits.

5. Other Investments by NRIs without repatriation benefits.

1. Automatic route of RBI with Repatriation Benefits:

NRIs can invest in shares/convertible debentures of Indian companies under the

Automatic Route without obtaining Government or RBI permission except for a few
sectors where FIPB permission is necessary, or where the investment can be made
only up to a certain percentage of paid up capital29.

2. Investment with Government Approval:

Investment not eligible under the Automatic Route, are considered by the Foreign
Investment Promotion Board (FIPB), a high Powered inter-ministerial body under the
chairmanship of Secretary, Department of Economic Affairs, subject to sectorial
limits/norms. These investments also enjoy full repatriation benefits30.

29
Aaron J. Douglas and Richard L. Johnson. (1994). Drainage Investment and Wetlands Loss: an Analysis of the
National Resources Inventory Data, Journal of Environmental Management, 40(4)
30
Axel Dreher, Peter Nunnenkamp, Krishna ChaitanyaVadlamannati, (2013). The Role of Country-of-Origin
Characteristics for Foreign Direct Investment and Technical Cooperation in Post-Reform India,World Development,

61
3. Other investments with Repatriation Benefits:

i. Investment in units of domestic mutual funds.

ii. Investment in bonds issued by public sector undertakings.

iii. Purchase of Shares of Public sector enterprises being disinvested by GOI.

iv. Investment in government dated securities (other than bearer securities) or

Treasury Bills.

4. Investments in Equity without Repatriation Benefits.

4.1 Capital contribution to any proprietary or partnership concern:

NRIs can invest by way of capital contribution in any proprietary or partnership

concern in India provided the firm or the proprietary concern is not engaged in any
agricultural/plantation activities or real estate business or print media on non
repatriation basis subject to certain conditions31.

4.2 New issues of shares/ debentures of Indian companies:

NRIs have been granted general permission to subscribe to the shares/ convertible
debentures of an Indian company on non- repatriation basis, and to an Indian company
to issue shares or convertible debentures by way of new/rights/bonus to NRIs on non-
repatriation basis provided that the investee company is not engaged in
agricultural/plantation activities or real estate business (excluding real estate
development i.e., development of property or construction of houses ) or chit fund or
is not a Nidhi Company32.

31
Banga R., Sahu P.K. (2013) Impact of Remittances on Poverty in India: Empirical Evidence. In: Siddhartha N.,
Narayanan K. (Eds) Human Capital and Development. Springer, India
32
Banik A., Bhaumik P.K. (2006) Foreign Investment: India. In: Foreign Capital Inflows to China, India and the
Caribbean. Palgrave Macmillan, London.

62
5. Other Investments by NRIs without Repatriation Benefits:

i. Investment in Non-Convertible Debentures.

ii. Money Market Mutual Funds.

iii. Deposits with companies.

iv. Commercial Papers.

NRIs are permitted to invest in the securities with repatriation benefits. NRIs can
invest by way of capital contribution in any proprietary or partnership concern in India
provided the firm or the proprietary concern is not engaged in any
agricultural/plantation activities or real estate business or print media on non-
repatriation basis subject to certain conditions33.

NRIs have been granted general permission to subscribe to the shares/ convertible
debentures of an Indian company on non- repatriation basis, and to an Indian company
to issue shares or convertible debentures by way of new/rights/bonus to NRIs on non-
repatriation basis provided that the investee company is not engaged in
agricultural/plantation activities or real estate business (excluding real estate
development i.e., development of property or construction of houses) or chit fund or
is not a Nidhi Company

33
Bhat K.S., Sundari C.U.T., Raj K.D. (2005) The Causal Nexus between Foreign Investment and Economic Growth in
India. In: Kehal H.S. (eds) Foreign Investment in Rapidly Growing Countries. Palgrave Macmillan, London

63
 Table-6.1
Total Investment Inflows 34

A. Total Investment Inflows (from April, 2000 to March, 2017):

Cumulative amount of Investment Inflows - US$ 484,351

(Equity inflows + 'Re-invested earnings' +'Other Million

capital')

Cumulative amount of Investment Equity Rs. US$ 331,991

Inflows 1,787,022 Million
(excluding, amount remitted through RBI's Cr.
NRI Schemes)

Source: RBI Publications

B. Investment Inflows During Fourth Quarter Of Financial Year 2016-17

(January, 2017 To March, 2017):35
Total Investment inflows into India - US$ 12,194
(Equity inflows + ‗Re-invested earnings‘ + Million

‗Other capital‘)
(as per RBI‘s Monthly bulletin)s
Total Investment inflows into India - US$ 12,194
(Equity inflows + ‗Re-invested earnings‘ + Million

‗Other capital‘)
(as per RBI‘s Monthly bulletin)s
Investment Equity Inflows Rs. 51,311 US$ 7,634
Cr. Million
Source: RBI Publications

34
Bishwajit Bhattacharyya, Direct Tax Reforms and NRIs, Financial Express, October 5, 1989,
35
Chandra, Mahesh and Shukla, D.C., Income Tax Law and Practice,

64
 Table-6.2
InvestmentEquity Inflows (month-wise) during the financial year 2016-17
Financial Year 2016-17 Amount of Investment Equity inflows

( April-March )

(In Rs. Cr.) (In US$ mn)

1. April, 2016 22,345 3,362

2. May, 2016 13,271 1,983

3. June, 2016 15,111 2,245

4. July, 2016 27,430 4,081

5. August, 2016 32,150 4,803

6. September, 2016 34,366 5,149

7. October, 2016 41,353 6,195

8. November, 2016 31,631 4,677

9. December, 2016 22,727 3,347

10 January, 2017 27,067 3,976

11 February, 2017 8,118 1,210

12 March, 2017 16,126 2,448

2016-17 (form April, 2016 to 291,696 43,478

March, 2017) #

2015-16 (form April, 2015 to 262,322 40,001

March, 2016) #

%age growth over last year (+)11% (+)9%

Source: RBI Publications

65
 Table-6.3
„t‟ test result-Investment flow
One-Sample Statistics

N Mean Std. Deviation Std. Error Mean

Investment 12 24307.91 9844.20 2841.77

Flow

One-Sample Test

Test Value = 24307

T df Sig. (2tailed) Mean 95% Confidence Interval of

the Difference
Difference

Lower Upper

Investment 11 .00 .916 -6253.79 6255.62

.00
Flow

Source: SPSS data analysis

From table and results given above represent the t-value in ‘t’column with ‘df‘ as the
degrees of freedom, and the statistical significance represented as ‗Sig. (2-tailed)‘.
The p value of majority of dimensions are greater than 0.05. From the mean value
analysis, it can be confirmed that majority of investors agreed on the influence
Investment policies on the inflow.36

36
Darst, D. M. (Ed.). (2015). Investing Background. In Portfolio Investment Opportunities in India,
doi:10.1002/9781119204091

66
6.2 NRIs Investment in Industrial Sectors

NRI Investment in India is a positive step taken by our government to stabilize the
national economy124. The Reserve Bank of India has permitted the NRIs, Overseas
Corporate Bodies (OCBs) and the Person of Indian Origin (PIOs) to make direct
investments in the companies that have India origin. This is in alignment with the
Automatic Route purchase of shares under the Portfolio Investment Scheme. In fact,
this facility is extended to the companies which have partnership or proprietorship
concerns as well37.

NRIs have the facility to invest in shares or debentures which are convertible and
belong to the Indian companies. Some of these direct investment facilities which are
available to the NRIs can be classified under the following: -

Automatic Route of RBI (including Repatriation Advantages)

i. Investment with the Approval of Government.

ii. Other Investments (including Repatriation Benefits).

iii. Investment in Equity (excluding Repatriation Benefits).

iv. Investments by NRIs (excluding Repatriation Benefits).

Some of these investment benefits also include the following: -

i. Deposits with Companies (Minimum Three Years).

ii. Investment in Government Securities/Shares.

iii. Investment in Domestic Mutual Funds.

iv. Investment in Bonds Issued By Public Sector Undertakings (PSUs).

v. Purchase of Shares of Public Sector Enterprises (By NRIs/PIOs/OCBs).

37
Joseph K.J. (2006) India: An IT Powerhouse of the South. In: Information Technology, Innovation System and Trade
Regime in Developing Countries. Palgrave Macmillan, London

67
Investments by NRIs without the benefits of Repatriation consist of the following: -

i. Deposits with Companies.

ii. Commercial Papers.

iii. Investment in Non-Convertible Debenture.

iv. Money Market Mutual Funds

Rules for NRIs to invest in India: -

As per the Section 2(V) of Foreign Exchange Management Act 1999, the following
three rules are applicable for NRIs who are eligible to invest in India: -

i. A person who resides outside India or has taken up employment outside India.

ii. Conducting business activities outside India.

iii. Staying outside India for an indefinite or uncertain time period.

iv. A person has been in possession of his Indian passport (provided he is not a

citizen of Pakistan or Bangladesh).

v. Either of his parents or grandparents were Indian citizen (as per the Indian

Constitution/ Citizenship Act of 1955).

68
 6.3 Portfolio Investment by NRIs (Shares &Debentures)

Portfolio Investment Scheme: Under RBI and FEMA, Non-Resident Indians

(NRIs) and Persons of Indian Origin (PIOs) are permitted to invest in the primary
and secondary capital markets in India through the portfolio investment Scheme
design (PIS). Under this Scheme, NRIs can acquire shares/debentures of Indian
companies through the stock markets in India. Currently there are diverse banks
which are proposing PIS accounts like ICICI Bank etc.38

The NRIs are allowed to invest under portfolio investment schemes subject to
following conditions:

i. The payment for shares and debentures is obtained through an inward

remittance in foreign exchange or by debit to the investor's NRE/FCNR account.

ii. On non-repatriation basis the payment for purchase of shares and debentures is
obtained out of capital held in NRO. Account or through an inward remittance
in foreign exchange or by debit to the investor's NRE/FCNR account.

iii. The investment should be made through a registered broker on a recognized

stock exchange. The NRI should route all transactions relating to purchase and
sale of shares / convertible debentures through a designated branch of an
authorized Dealer (Generally a Bank Branch). The paid-up value of shares of
and each series off convertible debentures of an Indian company, purchased by
each NRI both on repatriation and on non-repatriation basis, should not exceed
5 percent of the paid-up value/ each series of convertible debentures
respectively handed out by the company.

38Banga R., Sahu P.K. (2013) Impact of Remittances on Poverty in India: Empirical Evidence.
In: Siddharthan N., Narayanan K. (Eds) Human Capital and Development. Springer, India.

69
iv. The aggregate paid-up value of shares and each series of convertible debentures
of a company purchased by all NRIs/OCBs should not exceed 10% of the paid-
up capital / each series of convertible debentures of respective company. This
limit of 10% may be increased of 24% if a special resolution to that effect is
passed by the General Body of the Indian Company concerned.

v. The NRI investor should take delivery of the shares purchased and gives
delivery of shares sold. The net sale / maturity proceeds (after payment of taxes)
of such securities will be allowed to be remitted overseas or at his/its option
credited to NRE / FCNR/ NRO account. On non- repatriation it is credited to
NRO Account39.

vi. Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed
to invest in the secondary capital markets in India through the Portfolio
Investment Scheme (PIS). Under this scheme, NRIs can acquire shares of
Indian companies through the stock exchanges in India. PIS account is basically
required by regulator to monitor investment limit by NRI‘s in stock market. As
per the revised guidelines from RBI, PIS is not required for NRO (Non-
Resident Ordinary) account and investments under this will be deemed to be
domestic (at par with the investment made by residents).

Quick steps to get you started with trading in India;

Open NRO, NRE Saving and PIS NRE Bank account with Axis Bank / HDFC Bank
/ Yes Bank / IndusInd Bank Submit your SEBI registered broker name to PIS
designated bank on account opening form ask for PIS permission letter issued by PIS
designated bank for NRE investment and share it with broker open DEMAT and
trading account with SEBI registered broker for investing.

39
1Banik A., Bhaumik P.K. (2006) Foreign Investment: India. In: Foreign Capital Inflows to China, India and the
Caribbean. Palgrave Macmillan, London.

70
A walk through of trading and settlement process

Banks will process the trade settlement transaction as per First in First out (FIFO)
concept. Short term capital gain will also be debited as per FIFO methodology:

i. Park your amount which you desire to invest PIS bank account.

ii. PIS designated bank will share your NRE PIS account balance.

iii. Broker will provide trading limit based on account balance shared by bank.

iv. Trade executed as per order received.

v. Broker will submit contract note to bank for RBI reporting on T+1.

vi. Bank will settle the trade transaction as per bill to bill settlement.

vii. Separate transaction for purchase and sale will be settled.

viii. Purchase Transaction: T+1.

ix. Sale Transaction: T+2.

x. Debit of short term capital gain for sale transaction if any: T+2.

xi. Debit of PIS reporting changes: T+1 for purchase and T+2 for sale.

xii. Sale transaction for Rights/IPO/FPO/Bonus shares will be settled in saving

bank account instead of PIS bank account.

xiii. Intimation for rejection of contract note: T+1.

71
Purchase/sale transaction payments (PAYIN and PAYOUT) – Not processed by
PIS designated bank.

The payments for purchase and sale transaction will be rejected in the following cases
by the bank for purchase transaction:

i. Broker details are not available in bank records.

ii. Insufficient balance in PIS bank account but balance is available in linked saving
account.

iii. PIS designated banks offer a facility to transfer fund from linked saving account

to PIS account, however the process may vary from bank to bank.

Key things to take care of while investing in India

i. Always make delivery-based transaction. No Intraday and BTST transaction.

ii. Never trade in Banned and Caution scrip.

iii. NRIs can purchase up to a maximum of five percent of the paid-up capital of a
company.

iv. Avoid investment in Prohibited sectors.

v. Always reconcile your holding available in DEMAT account with bank record.

Bank charges applicable for PIS account

PIS Issuance Fee: Fees charged by banks for issuing PIS permission on behalf of RBI
to NRI clients. It is only applicable for NRE investment on NRE PIS Account.

PIS AMC: Annual maintenance charges levied by bank for providing PIS services.

PIS reporting charges: Charges levied by bank for doing settlement in bank account

and reporting all trade to regulator.

72
Investments in Mutual Funds:

NRIs are permitted to invest in mutual funds both on repatriable as well as non-
repatriable basis. However, investments in Money Market Mutual Funds can be made
only on non-repatriable basis. There is no limit for investments in domestic mutual
funds.

Investments in shares or convertible debentures of Indian companies:

NRIs can invest in shares using a DEMAT (Dematerialized Format) account.

However, RBI approval has to be got for each transaction. This is a cumbersome
process and not worth the trouble unless the investment is large (one cr. plus) and/or
to acquire significant stock holding in a company. The better option is to use the
mutual fund route for exposure to the stock market40.

Other Avenues

Investments in Government securities or units of Unit Trust of India: NRIs are

permitted to invest in Government securities through primary dealers. They are also
permitted to invest in units of UTI, either through authorized dealers or directly from
the Unit Trust of India. These investments are freely transferrable and saleable through
authorized dealers or upon repurchase by UTI. The maturity proceeds can be
repatriated, provided these are purchased out of funds remitted from abroad or from
NRE/FCNR accounts.

40
2Darst, D. M. (2015). Understanding India's Investment Potential. In Portfolio Investment Opportunities in India,
doi:10.1002/9781119204091.ch

73
4.6 NRIs Investment in Company Deposits

Non-Banking Financial Companies (NBFCs) can accept deposits from Non-Resident

Indians (NRIs) under some conditions such as the deposits should be debited from the
Non-Resident Ordinary (NRO) account of the NRI. Deposits from NRIs are also
accepted on the condition that the principal and interest amount would not be credited
to a Non-Resident External (NRE) account. The amounts received from the deposits
are also on non-repatriable41.

While keeping deposits with an NBFC, you must check the rating of the NBFC. It is
because an unrated NBFC cannot accept deposits. An NBFC may get itself rated from
rating agencies such as CRISIL, CARE, ICRA, FITCH, Ratings India Pvt. Ltd and
Brickwork Ratings India Pvt. Ltd. If the rating of an NBFC is downgraded below the
minimum investment grading rating then it can no more accept deposits.

NBFC scan be categorized broadly as follows:

i. Asset Finance Company (AFC): An AFC is a company which is a financial

institution carrying on as its principal business the financing of physical assets
supporting productive/economic activity, such as automobiles, tractors, lathe
machines, generator sets, earth moving and material handling equipment‘s, moving
on own power and general purpose industrial machines.

ii. Investment Company (IC): IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities Loan Company (LC):
LC means any company which is a financial institution carrying on as its principal
business the providing of finance whether by making loans or advances or otherwise
for any activity other than its own but does not include an Asset Finance Company.

41
33Jain Anil Kumar, Some Aspects of Income-Tax Administration in India, Uppac Publishing House, New Delhi, 2009

74
iii. Infrastructure Finance Company (IFC): IFC is a non-banking finance company

a) which deploys at least 75 percent of its total assets in infrastructure loans.

b) has a minimum Net Owned Funds of Rs. 300 cr.

c) has a minimum credit rating of ‗A ‗or equivalent d) and a CRAR of 15%.

iv. Systemically Important Core Investment Company (CIC-ND-SI) : CIC-ND-SI is

an NBFC carrying on the business of acquisition of shares and securities which
satisfies the following conditions:

a) It holds not less than 90% of its Total Assets in the form of investment in equity
shares, preference shares, debt or loans in group companies.

b) Its investments in the equity shares (including instruments compulsorily convertible

into equity shares within a period not exceeding 10 years from the date of issue) in
group companies constitutes not less than 60% of its Total Assets.

c) It does not trade in its investments in shares, debt or loans in group companies
except through block sale for the purpose of dilution or disinvestment.

d) It does not carry on any other financial activity referred to in Section 45I(c) and
45I(f) of the RBI act, 1934 except investment in bank deposits, money instruments,
government securities, loans to and investments in debt issuances of group companies
or guarantees issued on behalf of group companies.

e) Its asset size is Rs100 cr. or above and

f) It accepts public funds.

75
v. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): IDF-
NBFC is a company registered as NBFC to facilitate the flow of long-term debt into
infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5-year maturity. Only Infrastructure Finance
Companies (IFC) can sponsor IDF-NBFCs42.

vi. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI):

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the
nature of qualifying assets which satisfy the following criteria:

a) Loan disbursed by an NBFC-MFI to a borrower with a rural household annual

income not exceeding Rs. 60,000 or urban and semi-urban household income not
exceeding Rs. 1,20,000.

b) Loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in
subsequent cycles.

c) Total indebtedness of the borrower does not exceed Rs. 50,000.

d) Tenure of the loan not to be less than 24 months for loan amount in excess of Rs.
15,000 with prepayment without penalty.

e) Loan to be extended without collateral.

f) Aggregate amount of loans, given for income generation, is not less than 75 percent
of the total loans given by the MFIs.

g) Loan is repayable on weekly, fortnightly or monthly installments at the choice of

the borrower43.

42
Joseph K.J. (2006) India: An IT Powerhouse of the South. In: Information Technology, Innovation System and Trade
Regime in Developing Countries. Palgrave Macmillan, London
43
GirishAhuja and Ravi Gupta, Systematic Approach to Income Tax, SahityaBhawan Publication, New Delhi, 2013.

76
Points to remember before making NBFC deposits:

i. Public deposits are not secured.

ii. Depositors should take deposit receipts which are duly signed and stamped by an
officer authorized by the company on its behalf.

iii. The deposit receipt must contain all the details including name of the depositor,
date of deposit, deposited amount in words and figures, rate of interest payable, date
of maturity and the maturity amount.

iv. Deposit insurance is not available to the depositors in NBFCs.

v. The Reserve Bank of India (RBI) is not responsible and does not guarantee on how
financially sound a company is at present or any for the correctness of any statements
or representations made or opinions expressed by the company and / for repayment of
deposits / discharge of the liabilities of the company.

While making deposits you must check the conditions mentioned above as well as the
rating of the company. NRIs should note the select restrictions that are placed with
regards to payment from NRO accounts and not NRE accounts.

77
 CHAPTER – 7 SUMMARY OF FINDINGS AND
SUGGESTIONS
7.1 SUMMARY

In view of the adverse balance of payment position, increasing difficulty is

experienced in obtaining concessional borrowings, and aids and grants have more and
more strings attached. While embarking upon a rapid economic plan, it is a matter of
great importance for India to maximise the flow of remittances from NRIs. It is with
this view that the Government has recognised the importance of tapping this vast
reservoir of financial resources and its wisdom, and thought of extending liberal
facilities and incentives to NRIs.

Facilities for NRIs were considerably liberalized at the time of presentation of t%

1982-83 budget. There was a general liberalization in approach in 1985-86 when the
estate duty was abolished, delicensing of industries was announced, and a three-year
Export-Import Policy was introduced.

Over the years, exchange control formalities under Foreign Exchange Regulation Act
were considerably simplified for direct and portfolio investments. In 1988, the scope
of FCNR Account Scheme was widened by including Deutsche Mark and Japanese
Yen currencies, and also the NRI Bond was issued.

Though the NRI policy could be traced back to the 1960s, the Government adopted a
liberal policy only in recent years for promotion of NRI investment in India. These
investment channels include bank deposits, direct investment in industries, portfolio
investment in corporate securities, Government securities, units of UTI, etc. With a
view to attracting NRI investments, the Government has been providing a number of
special facilities and incentives to NRIs. Substantial relaxations were allowed during
the past eight years, and the procedures have been simplified on both repatriation and
non-repatriation bases.

78
Under bank account facility NRIs are permitted to maintain NRER, FCNR and NRO
accounts. The NRER account enables an NRI to maintain savings, current, recurring
and term-deposit accounts designated in Indian rupees. But the FCNR account permits
an NRI to maintain term-deposits only designated in four foreign currencies, viz., US
Dollar, Pound Sterling, Deutsche Mark, and Japanese 'Yen.

The entire credit balance in both these accounts including earnings is allowed to
repatriate outside India at any time. NRRR account fixed deposits of one year and
above carry an interest of two per cent higher than the rates on domestic deposits of
similar maturities. There is no restriction on local disbursements from the NRER
account. On the other hand, in case of FCNR account the interest rates for various
currencies and various maturity periods are prescribed by the RBI from time to time.
The interest depends on the currency and the period of deposit. However, fluctuations
in the value of the Indian rupee do not affect the NRIs.

NRIs are also allowed to maintain NRO accounts. These are opened by NRIs prior to
leaving India. Local rupee receipts can be credited to the account and local payments
can be made. However, funds cannot be repatriated abroad, and the interest earned on
this account is subject to income-tax.

Corporate securities provide a very exciting investment option for NRIs. For them
both repatriable and non-repatriable facilities are available in India. Shares can be
purchased through direct subscription for new issues or existing shares from the stock
market through stock brokers/stock exchanges.

Under direct subscription an NRI is allowed to invest cent per cent in new issues of
equity, preference shares and/or convertible/non-convertible debentures of public or
private limited companies or partnership or proprietary concerns, on non-repatriation
basis, except those dealing in real estate business or deriving income from
agricultural/plantation activities.

79
However, on repatriation basis NRIs are allowed to invest upto 40 per cent in new or
existing Indian companies (other than FERA companies) raising capital through
prospectus. Such companies should be engaged in industrial or manufacturing
activities or should be in hospitals including diagnostic center’s hotels of three to five
star category, shipping companies, companies undertaking development of computers,
software and exploration services. NRIs are allowed to invest in shares and debentures
quoted on stock exchanges (portfolio investment) in India, and such investments could
be made with full benefits of repatriation of capital investment and income thereon or
on non-repatriation basis.

If the portfolio investments are desired to be on repatriation basis, the following

conditions have to be met:

(a) purchase of shares/debentures has to be made through a recognised stock exchange

in India at the rates prevailing on the floor of the stock exchange;

(b) each NRI should hold not more than one per cent of the paid-up value of the equity
capital or each series of non-convertible debentures of the company;

(c) purchase of equity shares and convertible debentures is subject to an overall ceiling
of five per cent of the company concerned, and five per cent of the total paid-up value
of each series of convertible debentures of the company concerned. This limit of five
per cent applies to the portfolio investments on both repatriable and non-repatriable
bases;

(d) payment for such investments has to be made by fresh remittances from abroad,
or out of funds held in the NRERIFCNR account in India.

80
However, if the portfolio investment is to be made without the benefit of repatriation,
then such an investment could be made from the NRO account also. Further an NRI
cannot hold more than one per cent shares of equity capital and convertible debentures
of the company on repatriation basis; the NRI can, however, acquire shares in excess
of one per cent, within the overall limit of five per cent, on non-repatriation basis.

Portfolio investment in non-convertible debentures floated by Indian companies and

Master Shares of UTI through stock exchange is also allowed with full-benefits of
repatriation of capital and income earned thereon without any limit. But the holding
of the shares for a minimum period of one year is required to claim repatriation
benefits. Besides investing in shares and debentures, NRIs are allowed to invest in
company deposits, units of UTI, Government Bonds, and other investment schemes
like National Saving Certificates, etc.

NRIs could deposit in Indian Public Limited Companies either on repatriation or on

non-repatriation basis, provided the funds for repatriation basis investment are made
by sending remittances from aboard or from their NRER/FCNR account. However,
such repatriation benefits will be allowed only after three years. Deposits in companies
on non-repatriation basis could be made by NRIs from the NRO account also. The
interest rates are higher than on bank deposits because of an element of risk in case of
company failure.

The UTI provides opportunities to NRIs for investment in several schemes. Units can
be purchased through banks or stockholders/dealers. The investment is repatriable if
made in foreign exchange. Investment in Central or State Government Securities is
allowed on repatriation as well as non-repatriation bases without any limit. In addition,
NRIs are allowed to invest in public sector bonds and mutual funds set up by the
commercial banks, Life Insurance Corporation of India, and UTI on non-repatriation
basis.

81
On the whole, the NRI fund has been a policy induced flow. Although the RBI has
liberalized the facilities for investment by NRIs in shares and debentures of Indian
companies, and simplified the formalities in this regard it is necessary to develop the
infrastructure facilities for attracting large scale investments from NRIs.

In addition to liberalized incentives and the facilities, it is also essential to publicize

them among NRIs, provide authentic and current information, and furnish data
required for making preliminary investment decisions. And provide guarantee about
their tenure, bring more simplicity, certainty, and stability in the schemes, and also to
take effective steps to monitor the external exchange rate of Indian rupee. .Flow of
NRI funds has-been steadily increasing over the years. NRIs have obviously shown
greater interest in NRER and FCNR bank account deposits, than in direct and portfolio
investments. Although the NRI bank deposit has served the objective, a part of the
success is due to the prolonged spell of a strong US $. The sustained inflow of funds
under these schemes has avoided considerable support to the balance of payments
during the past few years.

Though many NRIs wish to participate in the country's industrial and economic
development, very few have actually come forward to do so, because they find
irksome bureaucratic hurdles such as inordinate delay in everything.

Government Bonds and other securities available to NRIs for investments in India
have been for long-periods, and hence the Government cannot hope to raise significant
subscriptions from NRIs because no one wants to lock up money for such long-periods.
Further most of the debentures issued by the Indian public limited companies and the
Government securities like the SBI bond are non-repatriable.

The NRI direct investments have not been substantial so far, but in future these are
likely to grow to the benefit of India, as some newer investments are significant in
terms of size and use of sophisticated modern-technology and better management. The
growth of the NRI portfolio investments is significantly dependent on the Indian

82
corporate sector, banks with foreign branches, merchant ranking agencies, stock
exchanges, and the relevant authorities concerned.

The conclusion is that the participation of NRIs in the country's industrial

establishment and production should be encouraged, as there is immense pressure on
the foreign exchange reserves. The country's repayment obligation to the IMF, the
hike in the international oil price, the fall in the rate of growth of indigenous oil
production, and mounting imports, etc., are some of the important factors which have
made NRI investments indispensable.

7.2 Findings
The major findings of the study are as follows:

1. The FERA classifies all persons with reference to their residential status into two
categories, whereas, the ITA classifies persons into three categories. It is observed that
a person who is a resident under FERA could be a non-resident under ITA and vice-
versa.

2. From the review of the NRI investment opportunities and benefits attempted in the
second chapter, it is obvious that tax concessions are allowed to NRIs. A major dis-
incentive was the deduction of tax at source at high rate. It was in practice for a long-
time. However, the deduction of tax at source has been reduced to 20 per cent on
investment income and long-term capital gains.

3. Prom the study of the evolution of NRI investment policy in India, it is found that
the liberalization of the rules regarding the NRI investment is in the right direction.
The simplification of the procedural formalities by the RBI is a welcome step. Also,
the opening of the gates of the investment facilities, so far confined to individual NRIs,
is now extended to companies, partnership firms, societies, and other corporate bodies
as well as trusts; and this is of great importance.

83
4. It is found from the analysis in the third chapter that the NRI deposits with banks
in India support excellent balance of payments position. It is further found farcin the
analysis that the growth rate of NRER deposit is higher in the initial period, and it is
also found statistically significant. In addition, it is found that there is a strong positive
correlation between the NRER deposit and the exchange rates for US $ and f, in terms
of Indian rupee.

5. The analysis reveals that the FCNR deposit has grown positively to the extent of
about 72 per cent in the latter period, as against the negative growth of the deposit in
the former period of the analysis. However, the growth rate for the deposit is found
statistically significant. It is found that there is a strong positive correlation between
the FCNR deposit and the exchange rates for the US $ and the British P. The main
reasons attributed to such an enormous growth of this fund are very attractive interest
rates, appreciation of currencies in the FCNR deposit against the Indian rupee,
inclusion of the Japanese Yen and Deutsche Mark as designated currencies, liberalized
investment climate provided by the COI, etc.

6. It is found from the currency-wise analysis of FCNR deposit that about 82 per cent
of the deposits are in the form of $ alone. However, the growth rate of the FCNR
deposits for $ and f is found statistically significant. The correlation analysis reveals
that there is a highly positive correlation between the FCNR $ deposit and AER for $.
he correlation between the FCNR f deposit and AER for f is also found to be strongly
positive.

7. The variation in the exchange rate of the foreign currencies in terms of the Indian
rupee has a direct relationship with NRI deposits in bank accounts in India. The
regression equation fitted -for the purpose also shows that the growth of NRER and
FCNR deposits is highly dependent on the exchange rates of $ and f.

84
8. There was no discrimination of interest rates between resident accounts and NRI
accounts for some years. However, there is now a difference of interest rates between
resident and non-resident accounts at a margin of one and two per cent respectively
for FCNR and NRER deposits, and the growth rates for the interest rate on NRER and
FCNR deposits are found statistically significant.

9. The correlation analysis reveals that there is a positive correlation between the
$ FCNR deposit and FCNR interest rate. In addition, the relationship is also found
highly positive between f FCNR deposit and FCNR interest rate. However, a positive
correlation is found between the NRER deposit and FCNR interest rate. In addition,
the regression analysis shows that the growth of FCNR and NRER deposits is
dependent on the interest rates on NRER and FCNR deposits. The growth of total
deposits (FCNR and NRER) is also found highly dependent on the $ exchange rate. It
reveals further that the growth of NRER deposit is found dependent on the FCNR
deposit at a higher level; on the other hand, the growth of BCNR deposit is also found
to be dependent on the growth of NRER deposit.

10. The cost benefit analysis of NRI investment shows that banks incur a loss -in the
case of NRER deposit, whereas for the FCNR deposit it is found that they make a
profit. The growth of the FCNR deposits also depends on the continuation of the
differential interest rate and repatriation facility.

11. It is observed from the analysis of the fourth chapter that a host of incentives have
been provided to NRIs for setting up enterprises. These include repatriation of capital
investment, and the income earned thereon to the extent of 40 per cent of the total
paid-up capital of the project. In addition, NRIs have been given incentives for import
of capital goods, components and raw-materials for setting up industrial units in India.

12. It is found that the direct investment grows at an enormous rate. The growth rates
for repatriable (40 % and 74 % schemes), and non-repatriable direct investments are
found to be statistically significant.

85
13. The Industrial Sector-wise analysis of NRI investment shows that a major portion
of the NRI investment goes to the 'Metallurgical' group of industries. Investment on
repatriation basis has been high in Metal, Medical and Electronic industries rather than
in Glass, Photos, Mechanical and Automobile industries. However, on non-
repatriation basis, they prefer to invest in Electronics, Paper and Plastic industries.

14. The State-wise analysis reveals that the NRIs prefer to set up the industrial units
in the State of Maharashtra. It has the highest share in the projects approved, followed
by New Delhi.

15. A significant relationship is found between the categories of type and size of the
family of the respondents and investment pattern in bank deposits, direct, and portfolio
investment schemes. Further a significant relationship is found between the categories,
duration of stay abroad, and 'reasons for leaving India' and Investment pattern in bank
deposits, direct, and portfolio investment schemes.

16. In the light of the analysis it 1s found that there is an insignificant relationship
between the categories of country of residence, religion, and age group of the
respondents and impact of incentives on bank deposits. A significant relationship is
found between the categories of lev21 of education and impact of incentives on bank
deposits.

17. It is statistically proved that there is a significant relationship between the

categories of occupation, level of income, and type of the family of the respondents,
and impact of incentives on bank deposits. An insignificant relationship is found
between the categories of 'size of the family', 'reasons for leaving India', and 'duration
of stay abroad' and 'impact of incentives on bank deposits'.

86
18. It is found that a majority of the respondents prefer to invest in direct, and portfolio
investment schemes, and government securities because certain investments In
specified assets are exempted from income tax, wealth tax, and gift tax. Tax-reduction
on long-term capital gains at a flat rate of 20 per cent, and earnings on Government
bonds, units of UTI, etc., are exempted from income tax.

19. The following null hypotheses were accepted '

There is no relationship between preference of bank deposits, and corporate securities

and the country of residence'.

'There is no relationship between preference of bank deposits, and corporate securities

and religion'.

'There is no relationship between the availing of incentives on bank deposit and age'.

'There is no relationship between the availing of incentives on bank deposits and the
country of residence'.

And the following hypothesis is also accepted.

'NRIs prefer direct investment to portfolio investment irrespective of their country of

residence, occupation, and level of income'.

However, the following null hypotheses were statistically found to be invalid.

'There is no relationship between the availing of incentives on bank deposits and

education'.

'There is no relationship between the availing of incentives on bank deposits and

income'

87
7.3 Suggestions
The following are the major suggestions prompted by the above analyses:

1. It is observed that most of the procedures covering exchange controls and taxation
were unnecessarily complicated and cumbersome leading to long spells of delay.
These problems could be resolved by the policy makers in consultation with NRI
representatives.

2. The policies and procedures have to be formulated considering all the aspects of the
problem. Some merchant bankers seem skeptical about getting large funds from NRIs
for investment in shares of Indian companies, since the procedure for repatriating the
sale proceeds of such investment is cumbersome at present.

The RBI authorizes repatriation of sale proceeds on production of a 'no objection'

certificate from the Income Tax Officer of NRI cell. Por getting such a certificate, the
non-resident investor has to wait till the assessment of his income for 6 particular year
is finalised. It would, therefore, he necessary to amend the relevant section of the ITA
for allowing repatriation of such sale proceeds, after payment of capital gains tax at a
specified rate at source, without the investor having to wait for completion of his
assessment of income in India.

3. Large banks having good overseas business, or banks which have been getting large
remittances from NRIs can start specialised desks for handling the work of
investments of NRIs. They could advertise such facilities through their overseas
branches. It might be useful if their overseas branches also have specialised desks for
handling investments of NRIs. Whoever takes such an initiative and starts offering
such services can hope to reap the benefit.

4. Operating the NRER account is considered as uneconomical from the point of view
of the banks; it is suggested that there is a need to cut the rate at which India borrows
from NRIs. This will generally be a bid higher than the deposit rate abroad, and yet a
bid lower than the rate at which India borrows commercially.

88
5. By exempting the NRI deposits from the statutory provisions of CRR and SLR,
banks may be allowed to release cent per cent of the NRI deposits, in order to enable
them to offset the loss expected to be incurred in the operation of an NRER account.
However, this proportion needs a closer look on larger interests of the national
economy.

6. It is necessary that banks should be allowed to have freedom in the matter of fixing,
and changing the interest rates on NRER/FCNR accounts so as not only to prevent
impairing their profitability but also to regulate the limited quantum of liquidity in the
banking system.

7. The GOI should take serious action in reducing and monitoring continuously the
gap between the rate of interest on external borrowing directly, and the rates on NRI
deposits to reach optimum level.

8. The RBI should review the FCNR interest rates " periodically to ensure that the
interest rates offered here are competitive against the interest rates prevailing
elsewhere; otherwise India may stand to lose in the long-run.

9. NRIs should also be allowed to open various accounts such as Savings, Current,
Recurring, etc., in FCNR scheme, by which the cost of FCNR funds can be further
reduced, and the investment inflow can also be increased.

10. It is suggested that there should be adequate protection of NRI funds against
foreign currency risks due to decline in the value of Indian rupee, particularly against
the dollar. Problems relating to the acquisition of house property by NRIs should also
be removed.

89
11. Regarding the ceiling on portfolio investment, it is observed that there is no logic
in rigidly enforcing the five per cent limit in the case of all, because the present policy
allows NRI investment upto 40 per cent, 74 per cent, and upto 100 per cent in a new
company as also in a fresh issue of an existing company in direct investment schemes.
So, the ceiling of one per cent and five per cent need to be relaxed.

12. In order to further motivate the NRIs to invest more in India the Indian companies
should provide adequate time for subscription. In addition, a Special Commission can
be appointed for providing adequate time for subscription of capital.

13. In order to interact with prospective investors abroad and keep them abreast of
what is going on in India and the opportunities awaiting them, it is necessary to create
greater awareness among NRIs about India's technical capability and potential
industrial base.

This could be done through organizing seminars, trade fairs, workshops, etc., and also
through pamphlets, and advertisements in various media in the countries where the
NRIs live. In addition to liberalizing the policies further, marketing the existing
investment opportunities among NRIs would probably woo more funds from them.

14. An aggressive marketing effort is called for to make the NRIs aware of these
investment opportunities. It is therefore, suggested that there is a need for a concerted
and well-coordinated effort to be initiated by Indian banks with branches abroad,
Government's missions, and embassies, and the offices of the IIC to bridge the
information gap, which in turn would prompt the NRIs to avail themselves of the
investment opportunities in their country of origin.

15. The GOI promises to honor its debts to foreign banks and other international
financial institutions such as the World Bank. At the same time the Government has
steadfastly refused to include its debts to NRIs in its official figure of external debt.
NRIs have, therefore, shown a great concern for this indifferent attitude of the COI. It

90
is suggested that the GOI may consider the idea of including NRI investments also in
the official figures of external debt.

16. In general, the NRI policy should be firm and clear. Where clarifications are
needed, Government response should be quick. Speedy decision-making will add to
credibility and to the confidence of NRIs. Undue delays and needless confusion will
defeat the policy itself.

7.4 Scope for Further Research

1. The present study is based on both primary as well as secondary data considering
the variables 'time', 'exchange rates', 'interest rates' and the personal variables such as
'age', 'education', 'income', 'occupation', 'country of residence', etc. However, studies
may be conducted including variables which can also influence the inflow of NRI
investments such as 'the industrial and investment policy existing in the country', 'the
awareness of the NRI investors about the fiscal laws in India and the investment
opportunities, incentives and concessions available to them'.

2. No attempt could be made in the present study in the evaluation of banks in wooing
NRI investments. So, further research can be done by analyzing the Bank-wise,
Region-wise, Sector-wise, and even State-wise progress of NRI deposits, and account-
holders. Thereby, the performance of the banks in India in during NRI funds into bank
accounts can be assessed.

3. Company-wise progress of NRI investments in equity/preference, convertible/non-

convertible debentures may be analysed; thereby lt can evaluate the performance of
the Indian companies in attracting NRI funds into capital market. It may also suggest
ways and means to improve the performance of them in luring NRI funds into new
fields.

91
4. A study can also be conducted on the cost of yield on optimum utilisation of NRI
funds. This will help the policy-makers to decide whether further incentives should be
given to NRIs.

5. The respondents selected for this study were from the State of Tamil Nadu and from
the Union Territory of Pondicherry. The socio-economic and cultural characteristics
may differ if such types of people are contacted elsewhere in India.

6. The study on the attitude of NRIs towards the investment facilities, incentives, and
concessions may be undertaken elsewhere in India adopting scaling techniques and
perceiving their attitudes. This would help the country to decide on areas where
concentration is needed urgently and badly.

7.5 RECENT TRENDS, CONCLUSIONS & FINDINGS

Recently there was a lot of hue and cry about the investment incentives offered by the
Government of India to non-resident Indians. There were allegations of take-over bids
against certain resourceful Indians residing abroad and having connections in the right
quarters in India. Some spokesmen of Indian industry described such investors as
"raiders". With the clamping of some restrictions on share acquisitions by NRIs vide
RBI's circular no. 12 dt: 16/5/83, the dust kicked up earlier by the package of
incentives and concessions to this class of investors has settled down somewhat. An
objective assessment of the whole situation needs to be made to see whether the "wolf"
cries of trade and business in India were really justified.

1 Fall outs of the liberalised portfolio investment policy

The Liberalisations in regard to portfolio investments in shares with or without

repatriation benefits together with the stipulation that foreign bodies corporate owned
to the to the extent of 60% by non-resident Indians were also eligible to make such
investments must have conjured up dreams of business take overs in many a shrewd

92
NRI residing abroad. Further these provisions literally gave a go by to the FERA
regulations. Theoretically it was possible for any listed company to have foreign
equity in excess of 40% by getting non-resident Indians or bodies corporate
predominantly owned by them to purchase shares through the stock exchange and still
retain its non-FERA status by securing a general permission under the FERA
regulations- Again it was not difficult for a non-resident collaborator with a 40X direct
participation in any listed Indian company to set up a 60"/,owned non-resident Indian
company abroad and secure a controlling interest in the former corposant by getting
the latter to buy its (former's) shares in the Stock Exchange. With large chunks of
established Indian companies' shares being held by financial institutions it was just
child's play for a wealthy, influential NRI or a group of such moneybags to strike a
deal with the institutions and take over the management of these companies.

Indeed it is precisely such disruptive forces that network and were responsible for
large scale buying of the scrips of two leading companies in Delhi, namely. Escorts
and DCM. Beth these companies were saddled with share transfers to WRIs or to
corporate bodies predominantly owned by such individuals, to such an extent that they
would have had, if accepted, a destabilising effect on their management and control.
One of these, Escorts, stood steadfast in its resolve not to register the share transfers
and in the process invited the wrath of the financial institutions, which had a major
stake in the company, against it. One such financial institution. The Life Insurance
Corporation of India with one stroke of the pen, requisitioned an extra ordinary general
meeting of the company with a view to replacing almost the entire Board with
institutional nominees. A battle royal was fought and ultimately the Supreme Court
while upholding the -financial institution's right to replace the directors directed the
RBI to enquire into the modus operandi of the non-residents in acquiring the shares.
The RBI has since submitted its report that the share acquisitions were in accordance
with exchange control regulations. In this case was that the approval of the RBI u/s 29
of FERA for acquisition of shares could be post facto.

93
2. The Supreme Court's observation

Certain observations of the Supreme Court need special mention. These are;

a. "In our view, the Parliament deliberately avoided the qualifying word "previous" in
section 29(1) so as to invest the Reserve Bank of India with a certain degree of
elasticity in the matter of granting permission to non-resident companies to purchase
shares in Indian companies".

b. "When construing statutes enacted in the national interest, we have necessarily to

take the broad factual situations contemplated by the Act and interpret its previsions
so as to advance and not to thwart the particular national interest Whose advancement
is proposed by the legislation. Traditional norms of statutory interpretation must yield
to broader notions of the national interest. If the legislation is viewed and construed
from that perspective, as indeed it is imperative that we do, we find no difficulty in
interpreting " permission” to mean "permission" previous or subsequent, and we find
no justification whatsoever for limiting the expression "permission" to" previous
permission" only. In our view), what is necessary is that the permission of the Reserve
Bank of India should be obtained at some stage for the purchase of shares by non —
resident companies".

C "The principal object of section 29 is to regulate and not altogether to ban the
carrying on in India of the activity contemplated by clause (a) and the acquisition of
an undertaking or shares in India of the character mentioned in clause (b) The ultimate
object is to attract and regulate the flow of foreign exchange into India. If that much
is obvious, it becomes evident that the Parliament did not intend to adopt too- rigid an
attitude in the matter and it was, therefore, left to the Reserve Bank of India, than
whom there could be no safer authority in whom the power may be vested, to grant
permission, previous or ex-post-facto, conditional or unconditional- The Reserve
Bank could be expected to use the wisely and in the best interests of the country and

94
in furtherance of declared Government 1 fiscal policy in the matter of foreign
exchange".

d. "We do not have the slightest doubt that paragraph 24-A.l is an explanatory
statement of guideline for the benefit of the authorised dealers. It is neither a statutory
direction nor is it a mandatory instruction".

e. "It is certainly not open to a company whose shares have been purchased by a non-
resident company to refuse to register the shares even after permission is obtained
from the Reserve Bank of India on the ground that permission ought not to have been
granted under the FERA".

f. "What does the sequence of events go to show? It shows the it the financial
institutions which held 527. of the shares of the company, and therefore, had a very
big stake in its working and future were aggrieved that the management did not even
choose to consult them or inform them that a writ petition was proposed to be filed
which could launch and involve the company in difficult and expensive litigation
against the government and the Reserve Bank of India. The financial institutions must
have been struck by the duplicity of Mr. Nanda who was holding discussions with
them while he was simultaneously launching the company of which they were the
majority shareholders into a possibly troublesome litigation without even informing
them",

g."It is therefore, difficult to accuse the Life Insurance Corporation of India of having
acted malafide in seeking to remove the nine non-Executive Directors and to replace
them by representatives of the financial institutions- Wo aspersion was cast against
the Directors proposed to be removed. It was the only way by which the policy which
had been adopted by the Board in launching into a litigation could be reconsidered
and reversed, if necessary. It was a wholly democratic process. A minority of share

95
holders in the saddle of power could not be allowed to pursue a policy of venturing
into a litigation to which the majority of the shareholders were opposed. That is not
how corporate democracy may function".

3.Other NRI acquisitions/ventures

Off-shore deals, whereby control of Indian companies has fallen into NRI hands, have
been perpetuated by other NRI as well. For instance, Swraj Paul, the Setia’s and the
Rampuria’s acquired control of four Tea companies viz. Warren Tea, Assam Frontier,
Jokai India and Assam brook in the manner, while the Hinduja’s took over Ashok
Leyland.

The Indian Card Clothing Co. Ltd. In a similar fashion two NRIs from Tanzania have
acquired control over the Indian Card Clothing Co. Ltd., Poona. This company,
engaged in the manufacture of sophisticated textile machinery, was 100% foreign
owned till 1978. Under the FERA regulations, the company was permitted a foreign
equity of74*4, held by two English companies. Accordingly in 1979 the foreign
collaborators divested themselves of 26% of their equity which was re-issued to the
Indian Public at a premium. In 1985 one of the two English companies, holding57'i of
the equity, changed hands when it was bought over by the Tanzanian NRIs.

10.4.2 The Apollo Hospital The Apollo Hospital, Madras, set up in 1983, is an unique
NRI venture and the very first hospital in the corporate sector. Besides having a
substantial NRI financial participation, the hospital has a large number of NRI
physician arid surgeons on its rolls. The hospital is well equipped to handle the most
complicated of medical cases. Dr. Pratap Reddy, the NRI Chairman of The Apollo
Hospital, has plans of establishing twenty, more hospitals in various parts of the
country, each as a separate corporate entity.

96
4. NRIs' ire at Kerala Government

A group of 30 WRIs have reportedly sued the Government of Kerala for fraud- These
NRIs had responded to a global advertisement of the Kerala Govt, owned Overseas
Development and Employment Promotion Consultants (ODEPC) to invest their funds
in a motel chain in Kerala. The idea was that ODEPC would own and operate the
motel project. It has been reported that NRIs who invested their funds have been kept
in the dark about the progress or otherwise of the project. The Kerala problem, if not
solved satisfactorily, is bound to scare any NRI investment.

5. Special efforts to attract NRI funds

The RBI has set up a special Cell at its Central Office in Bombay to deal with
proposals and enquiries relating to NRI investments in India. Apart from. handling
individual proposals expeditiously and systematically, this Cell keep sunder
continuous review the pace of implementation of various policies and procedural
reforms to encourage larger inflow of NRI funds under the various schemes.

97
 APPENDIX - I
APPLICATION FORM FOR OPENING FOREIGN CURRENCY

(NON-RESIDENT) ACCOUNT

FIXED DEPOSIT ACCOUNT

A/c No.......................
L.F No .......................
.............................19.........
To
Dear Sir,
I/We enclose a cheque drawn by me/us on ..................................--------- /draft No.---
-------- issued by............ .....................in your favour/on my/our account/have sent
you a T,T./M.T. through...........-..............................-...................... in your favor/on
my/our account/for...................................... which amount on realization please place
in fixed deposit at the current rate of interest for a period of................in my
name/our joint names; - -
(i)..................................................................
(ii )..................................................................
(iii ) ......................... ............. ............. ........
(iv)................. -....................... - ...................
The principal amount of the deposit/s in my/our name/s and interest thereon are to be
held at the/my disposal of (I) either of us or survivor (2) both of us jointly or
survivor (3) any___________________________ of us or
any ...................................................of the survivors of us or the survivors or the last
survivor of us, until you receive instructions to the contrary from both/all of us.
1/We hereby declare that I am/we are non-resident lndian(s)/of Indian origin. I/We
understand that the above account will be opened on the basis of the
statements/declarations made by me/us, and I/we also agree that, if any of the
statements/declarations made herein is found to be not correct in material particular,
you are not bound to pay any interest on the deposit made by me/us.

98
I/We also undertake to intimate the bank about my/our return to India permanent
residence immediately on arrival.
I/We agree that no claim will be made by me/us for any interest on the deposit/s for
any period after the date/s of maturity of the deposits. 1/We agree to abide by the
provisions of the Foreign Currency (Non-Resident) Accounts Scheme.
A set of specimen signatures on a separate sheet duly authenticated by a bank / India
ebassy / Nostary Public /person known to your bank is also attacted for your records.
instructions if any.................................................................

Yours faithfully,

Finality Occupation
.......................................... .............................................
.......................................... .............................................
.......................................... .............................................
.......................................... ............................................
press of the First Depositor

Specimen Signature
................................................... will sign thus .......................................
................................................... will sign thus .......................................
................................................... will sign thus .......................................
................................................... will sign thus .......................................

99
 APPENDIX – II
NRU

Form of Undertaking regarding non-repatriation of capital to be invested in

firms/companies in India and income earned thereon

In consideration of the Reserve Bank of India having agreed to permit me/us to invest
AMT* Rs....................(Rupees.................................................................................).
in .............................. ................................................*.......................................
(name of firm/company in which investment is to be made)
I/we...................................................................................................................
son/daughter/wife of...............................................................................................
(name of father/husband)
residing at....................................... do hereby agree and undertake that I/we will not
at any time, seek repatriation of the capital invested or of the dividends/profits/income
earned thereon. This undertaking will also be binding on my/our heirs, executors,
successors and assigns and they will not be entitled to seek repatriation of any capital
invested by me/us or any dividends/profits/income earned thereon.

Place: .......................... ........................... .........................

Signature/s of non-resident investor/s

Date; ..........................

Note: In case of public issues through prospectus, the Indian company issuing shares
may obtain the non-repatriation undertaking from the eligible non-resident investors
on the share subscription form itself. In such cases it will not be necessary to submit
separate undertaking to Reserve Bank. The Indian company should, however, confirm
while applying to Reserve Bank in form ISD for permission to issue shares/debentures
to non-residents that the required non-repatriation undertakings have been obtained
from all non-resident investors

100
 APPENDIX - III
NRI

Application from non-resident individual of Indian nationality or origin for

permission under Section 29(l)b) of Foreign Exchange Regulation Act, 1973 to
purchase shares of Indian companies through stow exchange/s in India without
benefits of repatriation of capital invested and income earned thereon

Instructions:

1. The application should be completed in duplicate and submitted to the Controller,

Exchange Control Department (Foreign Investment Division), NRI Cell, Reserve
Bank of India, Central Office, Bombay 400 023 through a designated branch of a bank
authorised to deal in foreign exchange in India. Under the Portfolio Investment
Scheme, only certain branches have been designated to undertake the work relating to
investments. In order to facilitate such investment, it would be advisable if the
applicant's account is maintained with the same brandy of the bank through which this
application is submitted.

2. This form may be used for permission to purchase debentures also.

3. Please give clear and complete particulars against each item. If any particular item
is not applicable, please write against it.

4. If space is not sufficient for giving full information/particulars against any separate
sheet may be attached to the application and serially numbered as of the items, as an
annexure.

5. Applicants wishing to purchase shares! debentures with repatriation benefits should

submit separate application on form RPI to the above office of Reserve Bank through
the same designated branch.

101
6. For the Purpose of the facility of investment in shares and securities, a person shall
be deemed to be of ‘Indian origin’ if (a) he, at any time, held Indian passport, or (b)
he or either of his parents or any of his grandparents was an Indian and a permanent
resident in undivided India at any time. A wife of a citizen of India or of a person of
Indian origin will also be deemed to be of Indian origin even though she may be of
non-Indian origin.

Particulars of the applicant: First Second third

(i) Full name holder holder holder
i) Overseas address* lii) (iii)
Nationality
(iv)
(iv) Details of current passport (a)
(a) Passport number (b)
(b) Place and date of issue (c)
(c) Issued by
(d)
(d) Country of residence as stated
in a passport
(e) Country of birth (v)
(v) If the applicant is not a citizen
of India, basis on which he/she
claims to be a person of 'Indian
origin '
(Please refer instruction No.6)

• address may be given if the second, third holder is resident in India.

102
 First holder Second holder Third
holder

(vi) Whether resident outside India

permanently; if not, since raiding (vi)
abroad
(vü) Occupation (employment, business,
vocation etc.)
(vii)
(viil) Relationship with other joint holders (viii)
2. Name and address of the bank branch
in India through which the applicant
desires to purchase shares./debentures
3. Source Of funds from which payment
for shares / debatures to be purchased
will be made :
(i) By from abroad
(ii) From non-resident bank account in (ii)
(a) Nature of account viz., NRE/ (a)
FCNR/NRO „count
(b) Account number
(c) Address of bank branch
maintaining the account

Place : ……………… …………………………

(signature of applicant)

Date : ……………….

103
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109
Abbreviations Used
AER: Average Exchange Rate
AIR: Average Interest Rate
CGP: Children's Gift Plan
COR: Certificate of Registration
CRR: Cash Reserve Ratio
ECM: Exchange Control Manual
ESCAP: Economic and Social Commission for Asia and the Pacific
EXIM POLICY: Export and Import Policy
FC: Foreign Collaboration
FCNR: Foreign Currency Non-Resident Account
FD: Fixed Deposit
FERA: foreign Exchange Regulation Act
GOI: Government of India
GTA: Gift Tax Act
HPR: Holding Period Return
IIC: Indian Investment Centre
IL: Industrial Licence
ITA: Income Tax Act
LIBOR: London Inter-Bank Offer Rate
LOI: Letter of Intent
NISIET: National Institute of Small Industry Extension Training
NRER: Non-Resident External Rupee Account

110
111
112