Foreign Investment in an unlisted company by a person resident outside India, as a subject is regulated under Foreign Exchange Management Act, 1999 (“FEMA”). Considering that in an unlisted company there are no public shareholders, regulations are less restrictive and procedures are comparatively easier to follow.
Investment in equity capital of an unlisted company is in the nature of capital account transaction under the FEMA law. Eligible investors for the same purposes are any person resident outside India. As an exception to same, any citizen / entity incorporated in a country which shares land border with India is allowed to invest only if approval from Government of India is obtained, even if investment is made under an automatic route.
An unlisted company is eligible to issue following equity instruments:
- Equity shares;
- Fully, Compulsorily and Mandatorily Convertible Debentures (“CCDs”);
- Fully, Compulsorily and Mandatorily Convertible Preference Shares (“CCPSs”);
- Share Warrants;
- Convertible Notes, if such unlisted company is a recognised start-up;
- Depository receipts issued against equity instruments;
Investment in an unlisted company can be classified in following two baskets:
- Investment on a non-repatriable basis by NRI / PIO;
- Investment on a repatriation basis by a person resident outside India.
Let’s understand above provisions in details:
- Investment on a non-repatriable basis by NRI / PIO:
Any foreign investment in an unlisted company, if made by NRI / PIO on a non-repatriable basis, it is considered as akin to domestic investment and accordingly, such investment would no longer holds colour of a foreign investment. Accordingly, in such cases, FEMA provisions would not apply so far as pricing norms and limit restrictions are concerned.
Also, if say a resident Indian who was holding investment in an equity instrument, later on shifts his / her place of resident and becomes NRI, such an investment would also be considered as investment on a non-repatriable basis as original investment was made domestically.
Such investment can be transferred without any FEMA implications to another resident Indian or person resident outside India on a non-repatriable basis. It can also be transferred by way of gift to another NRI / OCI, subject to same being held on a non-repatriation basis. Such investment can be transferred to another non- resident on a repatriation basis, subject to sectoral cap, pricing guidelines and compliance requirements.
However, sale proceed of such equity instruments can only be repatriable under USD 1 million scheme. Remittance of dividend income, interest income can be made on a regular basis without any conditions.
- Investment on a repatriation basis by person resident outside India:
Any foreign investment in an unlisted company by a person resident outside India on a repatriable basis is considered as foreign direct investment (“FDI”). Eligible investors for this purpose include individual who are non-resident in India, including NRI, PIO and legal entities such as company, LLP, partnership firm and any legal entity form recognised, incorporated in a country outside India.
It is to be noted that total holding of any NRI / OCI shall not exceed 5% of total post issue paid up capital on a fully diluted basis. Such limit on an aggregate basis for all NRI / OCI shall not exceed 10%, which can further be increased to 24% upon passing of special resolution by such listed company issuing equity instrument.
Investment on a repatriation basis would mean an investment, the sale/ maturity proceeds of which are (net of taxes) eligible to be repatriated outside India.
Such investment can be transferred to any person resident in India or to NRI/ OCI on a non-repatriable basis or to a person resident outside India on a repatriable basis.
When transfer is made to person resident outside India, on a repatriable basis, same shall be in compliance with pricing guidelines and sectoral limits and required approval from government needs to be obtained, wherever applicable, subject to entry routes and investment limits.
Pricing guidelines for a FDI on a repatriation basis is as under:
Particulars | Pricing norms |
Acquisition of equity instruments from i. a person resident in India; or ii. NRI / OCI, holding on a non-repatriable basis Or Issue of equity share capital by a listed company to such person resident outside India | Valuation must not be less than, The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant. |
Acquisition of equity instruments from i. A person resident outside India; or ii. NRI / OCI, holding such equity instruments on a repatriable basis | Pricing norms are not applicable, as transfer taking place outside India |
Transfer of equity instruments to i. A person resident in India; or ii. NRI / OCI, acquiring such equity instruments on a non-repatriable basis | Valuation must not be more than, The fair value as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. |
Transfer of equity instruments to i. A person resident outside India; or ii. NRI / OCI, holding such equity instruments on a repatriable basis | Pricing norms are not applicable, as transfer taking place outside India |
Further, it is to be noted that no special reporting compliance needs to be made by investor in India, upon conversion of CCDs and CCPSs by such an unlisted company.
If any investment is made in non-convertible instruments, same is not considered as FDI and is governed under ECB regulations.
Foreign investment in an unlisted company on a repatriable basis is considered as FDI and doesn’t change its colour depending upon % of ownership unlike as in listed company. Above are the provisions under FEMA for any unlisted company issuing equity instruments to a non-resident whether on a repatriable or non-repatriable basis.
For more detailed discussion on the above subject, please do not hesitate to connect at contact@devadhaantu.in
