Schedule 2 and 3 of the Notification No. FEMA 20/2000 RB contains provisions relating to Portfolio investment by NRIs. OCBs are not allowed to make fresh investments in India under the Portfolio Investment Scheme vide Notification No. FEMA 46 dated 29th November 2001. Further, in September 2003, RBI has banned OCBs from investing in any manner in India. In fact, the category of OCB has been abolished. However, they can continue to hold and sell shares purchased before 29th November 2001.
Portfolio investment is covered by general permission subject to following condition/provisions.
(i) Investment is permitted on repatriation as well as non-repatriation basis. (ii) Purchases, sale of shares (Preference and Equity) and/or convertible debentures are covered. (iii) Purchase/sale is done through registered broker of a registered broker of a recognised stock exchange. (iv) One bank branch must be designated by NRIs and all purchase/sale must be routed through that designated bank branch only. (v) All transactions of sales and purchase must be delivery based. Speculative transactions are not allowed. (vi) Mode of investment may be in any of the following ways: (a) For investment on Repatriation basis - inward remittances through normal banking channels - out of FCNR/NRE account. (b) For investment on non-repatriation basis Besides the above two, investment can be made out of NRO account. (vii) Ceiling on Investment (a) Per investor - 5% of the paid-up value of shares of an Indian Company on both repatriation and non-repatriation basis. - 5% of the value of each issue of convertible debenture of an Indian Company on both repatriation and non-repatriation basis. (b) Per investee Company (Total holding by all NRIs put together on both repatriable as well as non-repatriable basis.) 10% of paid-up value of shares of an Indian Company. 10% of paid-up value each series of convertible debenture.
This ceiling of 10% could be increased to 24%, if the General Body of concerned Indian Company passes a special resolution to that effect. It is interesting to note that FIIs are allowed to increase their investments under portfolio investments scheme up to the sectoral cap. Whereas NRIs are allowed to increase the limit only up to 24%. (viii) Repatriation of Sale/Maturity Proceeds (a) Sales proceeds of Investment held on repatriation basis can be credited to NRE/FCNR/NRO account after payment of applicable taxes. (b) If investment is on non-repatriation basis, credit of sale/maturity proceeds is permitted in NRO account. (ix) Existing OCBs (i.e. prior to Sep 16, 2003) must intimate the designated bank branch immediately on the holding/interest of NRIs in the OCB becoming less than 60%. (x) NRIs are allowed to enter into forward contracts to hedge their investment made in India. (xi) NRI is also permitted to invest in exchange traded derivatives contracts approved by SEBI from time to time out of his Rupee funds held in India on Non-Repatriable basis subject to the limits described by SEBI. (xii) NRIs can also invest without limit on repatriable basis in Government dated securities, treasury bills, units of domestic mutual funds, bonds issued by PSUs, shares in public sector enterprises which are being disinvested by Government. They can also invest without limit on non-repatriable basis. In Government dated securities,treasury bills, units of Domestic mutual funds, units of Money market mutual funds. However, NRIs are not permitted to make Investments in Small Savings Schemes including PPF.
Practical Issues:
(i) Can NRIs take their securities outside India?
There is no express prohibition in FEMA. As such "demat” being in vogue, physical transfer of security assumes little or no significance. Under FERA,general permission was granted for taking securities outside India.
(ii) Can NRIs invest under portfolio investment scheme out of funds borrowed in India?
No NRIs cannot invest out of borrowed funds in India.
(iii) Can power of attorney holder manage portfolio on behalf of NRIs?
Yes. A power of attorney holder can manage portfolio on behalf of NRIs. However, he cannot effect remittance outside India. With internet trading, life of NRIs has become easy for portfolio investments.
(iv) Can NRIs avail of loan against such securities?
Yes. NRIs can borrow against shares or other securities. However, the loan should be utilized for meeting the borrower’s personal requirements or for his own business purposes.
(v) Is any approval required from anyone to begin Portfolio Investment?
NRIs do not need any approval to undertake Portfolio Investment. They have to comply with the guidelines. FIIs need approval of SEBI and RBI. An application has to be filed with SEBI as the relevant rules. The application is forwarded to RBI. Both approvals are available simultaneously. One does not have to approach SEBI and RBI independently. In fact for FIIs, SEBI is the monitoring authority. Detailed rules are laid down under the SEBI law.
(vi) How can NRI begin portfolio Investment?
NRIs should comply with the following conditions: - The NRI designates a bank branch for routing all his purchase and sale transactions through that Bank branch only. - Purchase and sale is carried out through a registered broker on a recognized stock exchange. - All transactions of purchase and sale must be delivery based. Speculative transactions are not allowed.
(vii) Can income earned on Portfolio Investment be remitted abroad?
Income such as interest and dividend earned by NRI from portfolio investments acquired whether on repatriation basis or on Non-repatriation basis, can be remitted abroad provided applicable taxes have been deducted/paid. However capital gains can be repatriated only if investment is on repatriable basis.
(viii) Are NRIs required to file any reports to RBI?
NRI investor is not required to file any Return or Report with the RBI with regard to acquisition or sale of shares and/ or debentures in an Indian Company. Only the link office of the designated bank branch is required to furnish a report on daily basis on Portfolio Investment Scheme Transactions to RBI.
Designated Branch: As per RBI norms, NRI investors are required to route all their PIS transactions through only one designated branch of a Bank, for the sake of monitoring of NRI holding in a particular company. These branches shall handle PIS transactions and report the same to the nodal branch, on a daily basis, to enable consolidated reporting to Reserve Bank of India. Opening of accounts with the designated branch: An NRE savings bank account together with an NRE Demat account, if the investments are to be made on a repatriation basis.
An NRO savings bank account together with an NRO Demat account, if the investments are to be made on a non-repatriation basis.
For the forms, documents / details, along with other regular account opening forms as applicable to NRE/NRO/Trading/Demat accounts, pleaseCLICK HERE
Power of attorney duly stamped, signed and notarized, authorizing the local resident/ broker to act as the attorney of the investor for investment decisions to be produced by the account opener, in original, at the time of opening the account. A copy thereof will have to be kept together with the other documents. In case of transfer of accounts, a declaration in respect of shares already held, if any, with details of acquisition and whether acquired on repatriation or non-repatriation basis. If the shares have been acquired on a repatriation basis, the designated branch should insist on a certificate to this effect from the transferring bank.
Prior Holdings of Shares and Debentures:
An NRI customer opening an account with the bank, under PIS, may bring with him previous holding of stock to be credited to his Demat account. In case of such transfers of stock, the designated branch will verify the following:
1). Whether the shares have been purchased out of repatriable / non-repatriable funds 2). In case the shares have been purchased out of repatriable funds, the same should be supported by one of the following evidences : * A Bank Certificate to this effect * Company’s certificate that allotment has been made out of NRI quota of shares * The relative share / debenture certificate which is branded as being allotted out of NRI quota. In case the nature of investment cannot be verified, the status of the scrip will have to be ascertained by referral to RBI.
Registration of Shares and Investment in Joint Names:
In case of shares / debentures purchased by NRIs in joint names, the first holder is to be treated as the investor for the purpose of 5% ceiling. The second or third holder will be eligible to invest separately in the same company in his own name as the first holder in joint holding upto the limit of 5%. Prior approval can also be obtained from Reserve Bank for investment jointly with residents. However, if the resident joint holder inherits the shares /debentures, he / she will not be entitled to repatriation benefits. Branches may maintain customer-wise / company-wise, by way of an Excel worksheet to monitor the individual ceiling limit. Separate sheets will be opened for investment out of NRE / NRO funds.
Operation of accounts:
A registered stock broker, on the strength of a specific Power of Attorney (POA) can operate the account for investment in stocks and debentures. A copy of the same, duly verified by the branch with the original, will be submitted to the designated branch before operations in the account commence.
Identification of a stock broker is the responsibility of the investor.
On completion of the formalities, brokers can draw funds for investment on the strength of POA, on behalf of the constituent. It should be ensured that the designated branch will obtain the relative broker’s notes / contracts, representing the actual purchase or sale transaction, preferably on the day of the transaction itself.
In case of a sale, the covering sale note submitted by the brokers should indicate the date of purchase of the stock and the cost of acquisition. If not, the said details have to be immediately called for from the brokers to facilitate computation of tax liability of the investor on either short-term or long-term capital gains, before credit of sale proceeds.
