The Foreign Exchange Management (Non Debt Instruments) Rules, 2019 governs the manner in which any non resident can make investment in any Indian Company. The investment can be in form of debt and equity. Under this Article, we have discussed the provisions governing the investment by non-residents in equity of an Indian company.

Person resident outside India are eligible to subscribe, purchase or sell equity instruments of an India company in compliance with the norms as defined for listed and unlisted company. However Reserve Bank of India has formulated 3 entry routes for the non-resident investors to make investment in any Indian company.

The aforementioned route apart from providing the requirement of any approval, if any, also provides for certain specific condition to be complied with in case of investment is specific sector.

While most of sectors are covered under automatic, following specific sectors falls under the government route

1. Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities
2. Terrestrial Broadcasting FM (FM Radio),
3. Up-Linking of ‘News & Current Affairs’ TV Channels
4. Publishing of newspaper and periodicals dealing with news and current affairs
5. Publication of Indian editions of foreign magazines dealing with news and current affairs
6. Publishing or printing of Scientific and Technical Magazine or specialty journals or periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting
7. Publication of facsimile edition of foreign newspapers
8. Satellites Establishment and operation,
9. Private Security Agencies
10. Multi Brand Retail Trading (MBRT)

Beside the above, following are the sector, where no investment by non-resident is allowed:

1. Lottery business including Government or private lottery, online lotteries, etc;
2. Gambling and betting including casinos, etc;
3. Chit funds;
4. Nidhi company;
5. Trading in Transferable Development Rights;
6. Real estate business or construction of farm houses;
7. Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;
8. Activities or sectors not open to private sector investment e.g. atomic energy and railway operations;
9. Foreign technology collaborations in any form including licensing for franchise, trademark, brand name, management;
10. Contract is also prohibited for lottery business and gambling and betting activities.

Permissible instruments for Investment in Indian Company

A non-resident can invest in an Indian Company through the following instruments

1. Equity Shares
2. Compulsorily Convertible Debentures
3. Compulsorily Convertible Preference Shares
4. Share warrants
5. Convertible Notes by start-up

Any non-resident can subscribe/ purchase/ sell in equity and other eligible instruments of an Indian Company. Provided a person who is a citizen of, or entity which is incorporated in or investment in India, who beneficial owner is entity incorporated or citizen of, Bangladesh , Pakistan , China, Bhutan, Afghanistan, Myanmar and Nepal can’t make any foreign direct investment without the prior government approval. Further a citizen of Pakistan or an entity incorporated in Pakistan cannot invest in defence, space, atomic energy and sectors or activities prohibited for foreign investment even through the government route.

While any non-resident can invest in an Indian Company upto the limits allowed under various i.e. automatic route or government route etc., but for specific set of investors like Non-resident Indian, Foreign Portfolio Investor, Foreign Venture Capital Fund etc, separate rules are provided.

Mode of Investments

A person resident outside India is eligible to make investments in an Indian company by the two specified modes as mentioned herein below:

Purchase of equity and other eligible instrument directly from the Indian Company

An Indian Company may allot equity shares and other eligible instruments by way of private placement or rights issue or bonus issue. In case of private placement, the equity shares and other eligible instruments shall be priced in the following manner:

• the price worked out in accordance with the Securities and Exchange Board of India guidelines in case of a listed Indian company;
• the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker registered with the Securities and Exchange Board of India or a practising Cost Accountant, in case of an unlisted Indian Company.

Purchase of equity and other eligible instrument of an Indian Company

A non-resident can acquire equity and other eligible instrument of an Indian Company from an existing member of the Company whether Indian resident or non-resident by way of purchase or gift. But any such acquisition will requirement government approval, in case the Indian company is engaged in a sector where investment is allowed under the government route or investment is beyond the limits upto which it is allowed under automatic route.

Further proposal to acquire shares or any convertible instrument of any Indian entity from resident or a non-resident, directly or indirectly, resulting in the beneficial ownership falling in hands of citizen of, or entity which is incorporated in or investment in India, who beneficial owner is entity incorporated or citizen of, Bangladesh , Pakistan , China, Bhutan, Afghanistan , Myanmar and Nepal will require prior government approval.