NRIs can look into investing in unlisted stocks as a different asset class

NRIs can invest in unlisted companies either by becoming a promoter director of a new venture in India or by buying stake in a private limited company or even through placements in public limited companies that are not yet listed.

Dec 11, 2018 10:12 IST India Infoline News Service

NRIs have been attracted towards investments in India considering its economic growth coupled with opportunity to earn higher rate of returns across various asset classes. NRI investments in equities via the Portfolio Investment Scheme (PIS) and mutual funds mode are already well-known.

However, not much is known as to whether NRIs can also invest in unlisted companies in India. The answer is an emphatic “Yes.” NRIs can invest in unlisted companies either by becoming a promoter director of a new venture in India or by buying stake in a private limited company or even through placements in public limited companies that are not yet listed. NRIs can buy stake in public-listed companies as an anchor investor ahead of a listing, subject to the normal minimum lock-in stipulations. Such investments are through the normal PIS channel. Let us focus more on NRI investments in private limited companies.
 
How NRIs can invest in private limited companies
Non-resident Indian (NRI) investments into private limited companies are governed by the Foreign Exchange Management Act (FEMA) Rules 1999. NRI Investment in Private Limited companies can be undertaken by two categories of investors:
  • An NRI who holds an Indian passport but is not a resident of India as per the minimum stay stipulations laid out in the Income Tax Act
  • A Person who holds a foreign passport known as a Person of Indian Origin (PIO) is also covered by these NRI regulations pertaining to investments in private limited companies.
Investment in unlisted companies by NRIs can either happen in the form of an investment in registration of a new business or by investing in an existing private limited company.
 
NRI investments in registration of new business in India
Since the Modi government embarked on the “East of Doing Business,” rules and regulations have been substantially relaxed for NRIs to invest in India. These include faster and simplified procedures as well as the electronic submission of documents. Further, private companies in India entail fewer compliance requirements compared to public limited companies, which makes it more attractive to NRIs.
Following are some of the key NRI stipulations pertaining to the incorporation of a new company in India.
  • NRIs can subscribe to the MOA and the AOA and take up shares of Indian companies for their incorporation. NRI can start a business as a private limited company or as an LLP with limited liability
  • NRIs can be directors or shareholders as prescribed under the Companies Act 2013 in a private limited company.
  • NRI investment in private limited companies will be governed by the extant government regulations pertaining to FDI limits for approval and for shareholding, depending on the sector in which the company intends to operate.
  • Like resident Indians, NRIs can also incorporate the company with limited liability entirely online. The procedure is the same as for Indian directors or shareholders.
  • NRI-floated companies must have at least one director or shareholder of Indian origin. Also, the NRI will be required to get copies of his passport and address proof attested at their respective Indian Embassies, High Commissions or Consulates as the case may be.
  • In addition, like any resident Indian floating a private company, NRIs also have to acquire DIN or DSC, get approval for name reservation, get approvals for MOA and AOA, and get an incorporation certificate, obtain PAN, TAN, and GST registrations.
NRIs can also buy equity/preference shares and debentures of private companies
Investments by non-residents in Indian companies can be made as foreign direct investments and are regulated by the RBI. NRIs are allowed to invest in accordance with the policy laid down by the RBI. NRI investments in private companies will be treated as foreign direct investments (FDI) and will be covered by the relevant FDI sectoral caps.
 
FDI in a a private limited company can be through various equity instruments. Indian companies can issue equity shares, preference shares, and convertible debentures, subject to the guidelines. The equity shares of a private limited company issued under FDI must be at fair value. In case of a newly incorporated entity, the shares can be issued at face value.
FDI Limits Sector Description
Sectors with FDI prohibition Atomic Energy, lottery including online lottery, betting including casinos, business of chit funds, Nidhi company, trading in transferable development rights, real estate business or construction of farm houses, manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes, railways, etc.
FDI under Approval Route Petroleum sector (except for private sector oil refining), natural gas / LNG pipelines, Investing companies in Infrastructure & service sector, defence and strategic industries, atomic minerals, print media, broadcasting, postal services, courier services, establishment or operation of satellites, development of integrated township, tea sector, asset reconstruction company (ARC), etc.
100% Automatic FDI All other sectors not included in the list above are eligible for 100% FDI

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