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February 22, 2007
NRIs may be permitted to invest in India through
sub-account route
Securities
and Exchange Board of India (SEBI) is reported to have, in
its recently concluded board meeting, discussed a proposal to
allow overseas investors like non-resident Indians (NRIs),
foreign firms and individuals to invest in Indian capital markets
by registering themselves as sub- accounts with Foreign
Institutional Investors (FIIs). Under the extant FII
Regulations foreign corporates and foreign individuals are allowed
to invest through the FII/sub-account route hence it will have to
be seen what further refinements will be made in the existing
regulatory framework as regards these investors. However, the
objective of the proposal seems to expand the categories of
eligible investors by allowing NRIs to register themselves as
sub-account and thereby allowing them to invest under the FII
regime.
Under
the FII regulations NRIs currently are not allowed to register
themselves as FIIs or sub-accounts and the only route available
for NRIs to invest in the Indian capital markets is through
Portfolio Investment Scheme (PIS) laid
down under the Indian exchange control regulations. Under
PIS an NRI can invest only up to 5% of the total share capital of
the Indian company and the aggregate investment by NRIs is capped
at 10% of the total share capital which can be increased to 24%
subject to a special resolution of the shareholders of the company
in that regard.
Thus
aggregate investment by NRIs is capped at 24% of share capital of
the company. However, in case of limit on aggregate investment by
FIIs/sub-accounts, shareholders of the company may by way of a
special resolution increase FII/sub-account investment limit from
the prescribed 24% to the maximum permissible foreign investment
threshold laid down for companies engaged in various sectors.
SEBI and RBI will have to iron out these inconsistencies before
they decide to implement the proposal.
Implications
-
NRIs
will be able to pool their monies in a tax treaty jurisdiction
and thereby benefit from low or nil tax liability in India.
Hitherto investments by NRIs were generally made directly from
their home country jurisdiction that may not necessarily be
tax efficient.
-
Flexibility
to appoint professional investment managers to manage pooled
vehicles and thus not just benefit from their expertise but
also delegate the burden of managing the portfolio and keeping
track of it.
- NRIs
will now be able to spread their investment risk by investing
in to a pooled vehicle as opposed to direct investments
through PIS route which has relatively greater investment
risk.
To
make the above a reality SEBI and RBI will have to suitably amend
the FII Regulations and exchange control regulations respectively.
It remains to be seen in what manner and when the existing
regulatory framework will be amended.
Source:
The
Economic Times dated February 21, 2007.
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