RBI relaxes norms for non-resident investors

Allows them to take FDI route, buy shares directly on stock exchanges

In yet another step to attract foreign money, the Reserve Bank of India (RBI) on Friday allowed non-resident investors to acquire shares of listed Indian companies through stock exchanges under the foreign direct investment (FDI) scheme.

The central bank has said such investment will be allowed only if the non-resident investor has already “acquired and continues to hold control” according to the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations.

At present, foreign institutional investors (FIIs), qualified foreign institutions and non-resident Indians (NRIs) are eligible to acquire shares on stock exchanges in compliance with FEMA regulations, but they are not permitted to acquire shares on bourses under the FDI scheme.

According to experts, the new regulation will pave the way for foreigners to be treated on a par with FIIs, as they can buy shares in the company they control (in line with the Sebi takeover code regulations) through on-market deals. Earlier, they were allowed to do so only through off-market deals.

“This is a very important step and will have a far-reaching impact,” said Lalit Kumar, Partner at J Sagar Associates.

“This will also have tax implications, as stock market transactions don’t attract capital gains. Also, the move to allow such acquisitions to be funded through dividend paid to NRIs is significant. The move will help attract capital flows into the Indian market,” said Lalit Kumar, Partner at J Sagar Associates.

Such transaction should happen through a registered broker, RBI said in a notification.

Earlier, a non-resident wasn’t permitted to acquire shares on stock exchange.

Some experts were of the view that the move was a step towards fuller convertibility of the rupee. “This is a step towards full convertibility of the rupee. Right now, we allow repatriation of capital to a select class of investor and in select assets. Now, this window has been opened to even foreign individuals and NRIs. This makes India a more attractive investment destination,” said Sivarama Krishnan, executive director, risk advisory services of consultant firm PwC.

The central bank has also laid out certain conditions for the sources of funds for purchase of shares. The amount should be paid by way of inward remittance through normal banking channels, the RBI said. It further said the amount can be paid by way of debit to the NRE/FCNR account of the person concerned or paid by debit to a non-interest-bearing escrow account (in rupees) maintained in India.

Further, the consideration amount can be paid out of the dividend paid by Indian investee company, in which the said non-resident holds control. Such dividends, however, should have been credited to specially designated non-interest bearing rupee account for acquisition of shares on the floor of stock exchange.

RBI has also said that the original and resultant investments have to be in line with the extant FDI policy and FEMA regulations in respect of sectoral cap, entry route, reporting requirement, and documentation.

LURING FOREIGN FUNDS

* NRIs qualify only if they have “acquired and continue to hold control” under  Sebi norms

* Foreigners could be treated on a par with FIIs as they get on-market-deal window

* Deals can only happen through a registered broker

* Some experts say step a precursor to fuller convertibility of the rupee

* Share purchase should be paid by inward remittance through banking channels

* Amount can be paid via debit to NRE/FCNR accounts or via debit to non-interest bearing escrow account