DPIIT note: New FDI route through NRIs?

Investment made by an Indian entity that is owned and controlled by an NRI on a non-repatriation basis won’t be considered for the calculation of indirect foreign investment, the department for the promotion of industry and internal trade said in a notification. Hitherto, non-repatriable NRI investments in Indian companies have not been counted as FDI but downstream investments by such firms retained the FDI tag.

Some analysts say the clarification by the government could open a window for foreign investors to raise their investments in Indian companies in sectors where FDI is capped, beyond the prescribed ceilings.

Foreign investors seeking to gain greater control of Indian entities in such sectors could do so by using the NRI route, they say.

Others, however, point out that the clarification might not open a new FDI vista, given that direct investments by NRIs in Indian companies on a non-repatriable basis are not counted as FDI even now.

Foreign investors have been vying for a greater slice of the Indian market in sectors like multi-brand retail, insurance and banking. In multi-brand retailing, FDI up to 51% is allowed with government official. Similarly, up to 49% FDI is currently allowed in insurance, but the government has now placed a Bill in Parliament to raise it up to 74%. In banking, up to 74% FDI is permitted.

A senior government official told FE that the new notification is essentially a clarification to make it more explicit and clear any doubt. Even now, such investments are not considered as FDI for the purpose of computing indirect foreign investment.

Rajesh Gandhi, partner at Deloitte India, said the notification “is in line with the existing policy that NRI investment on non-repatriation basis is treated on a par with rupee investment”.

NRIs have many investment options in India : Non-Resident External (NRE) and Non-Resident Ordinary (NRO) scheme (both rupee accounts) and the FCNR (foreign currency) scheme. The NRO account is primarily used to park Indian-sourced income of an NRI; from this account,remittances outside India are allowed only up to $1 million under the automatic route, while higher remittances require RBI approval. Since unlike the NRE account, interest accrued on NRO account are taxable, this is not preferred by most NRIs.

NRI investments on a repatriation basis in Indian companies, since these are FDIs, are subject to regulations and caps.