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The committee headed by finance secretary Arvind Mayaram recommended simplifying the classification of foreign investment with a carve-out for NRIs within it “in view of their special status”. Photo: Ramesh Pathania/Mint
The committee headed by finance secretary Arvind Mayaram recommended simplifying the classification of foreign investment with a carve-out for NRIs within it “in view of their special status”. Photo: Ramesh Pathania/Mint

Panel suggests exempting NRIs’ non-repatriable investments from FDI limits

If accepted, NRIs making investments of non-repatriable nature would not have to worry about sectoral curbs, government approvals needed for foreign investors

New Delhi: A panel headed by finance secretary Arvind Mayaram has suggested treating non-repatriable investments by non-resident Indians (NRIs) as domestic investment, exempting it from foreign direct investment (FDI)-related conditions, in an attempt to boost inflows of funds.

If accepted, the recommendation would mean NRIs making investments of non-repatriable nature would not have to worry about sectoral restrictions and caps as well as government approvals needed for foreign investors if they wish to invest in Indian companies.

The committee was set up last year by then finance minister P. Chidambaram to rationalize the definition of FDI and foreign institutional investment (FII). The panel’s report was made public on Friday evening.

Unlike an earlier draft version reviewed by Mint, the report does not talk about increasing the FDI limit to 49% across sectors, barring a few, or a sectoral composite cap for foreign investors.

Given that NRIs, or people of Indian origin living overseas, have set up large businesses abroad and may prefer investing through corporate entities, this should be permitted with safeguards, said the report.

“Overseas Corporate Bodies was one such vehicle, but for various reasons, that has been derecognised in late 2003. With suitable safeguards and checks, this can be revived in a different form and NRI investments enhanced," the report said.

The committee recommended simplifying the classification of foreign investment with a carve-out for NRIs within it “in view of their special status".

The move would help attract more NRI funds into the country, said Devraj Singh, executive director of tax and regulatory practices at EY India, the Indian arm of the consulting firm previously known as Ernst and Young.

“The suggestion has been there for a long time. It is good that the committee has finally formalized the proposal," he said.

Chidambaram, in his 2013-14 budget, introduced new definitions for FDI and FII. While all foreign stakes of 10% or less in a company were defined as FII, or portfolio investment, more than that were categorized as FDI.

The market regulator, Securities and Exchange Board of India, has since notified a new category of investors called foreign portfolio investors (FPIs), which includes FIIs, their sub-accounts and qualified foreign investors.

The Mayaram committee recommended that foreign investment of 10% or more through eligible instruments made in an Indian-listed company be treated as FDI, while such investment by way of equity shares, compulsorily convertible preference shares or debentures amounting to a less than 10% stake be treated as FPI.

Foreign investment in an unlisted company, irrespective of threshold limit, may be treated as FDI. All existing foreign investments below the threshold limit made under the FDI route shall however, continue to be treated as FDI.

An investor may be allowed to invest below the 10% threshold and this can be treated as FDI if the investor promises to raise the stake to 10% or beyond within one year from the date of the first purchase.

“The obligation to do so will fall on the company. If the stake is not raised to 10% or above, then the investment shall be treated as portfolio investment," the report added. In a particular company, an investor can hold the investments either under the FPI route or under the FDI route, but not both.

The report said necessary checks and balances need to be placed to ensure that FPIs do not act in concert or a single FPI investor does not circumvent the regulatory framework by splitting the investment or by acting in concert with others.

The report also recommended setting up of another committee to look into the regulations for foreign venture capital funds.

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