Master Circular on Foreign Investment in India (2007)

Reserve Bank has given general permission to SEBI registered FIIs/sub-accounts to invest under the PIS. Total holding of each FII/sub account under this Scheme shall not exceed 10% of the total paid up capital or 10% of the paid up value of each series of convertible debentures issued by the Indian company. Total holdings of all FIIs/sub-accounts put together shall not exceed 24% of the paid-up capital or paid-up value of each series of convertible debentures. This limit of 24% can be increased to the sectoral cap / statutory limit as applicable to the Indian company concerned, by passing a resolution of its Board of Directors followed by a special resolution to that effect by its General Body. A domestic asset management company or portfolio manager, who is registered with SEBI as an FII for managing the fund of a sub-account can make investments under the Scheme on behalf of (i) a person resident outside India who is a citizen of a foreign state, or (ii) a body corporate registered outside India; Provided such investment is made out of funds raised or collected or brought from outside through normal banking channel. Investments by such entities shall not exceed 5% of the total paid-up equity capital or 5% of the paid-up value of each series of convertible debentures issued by an Indian company, and shall also not exceed the overall ceiling specified for FIIs. FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: i) Business of chit fund, or ii) Nidhi Company , or iii) Agricultural or plantation activities or iv) Real estate business, or construction of farm houses v) Trading in Transferable Development Rights (TDRs). 'Real Estate Business' mentioned above, does not include development of townships, construction of residential/commercial premises, roads or bridges. SEBI registered FIIs are allowed to trade in all exchange traded derivative contracts on recognised Stock Exchanges in India subject to the position limits as prescribed by SEBI from time to time. The SEBI registered FII/sub-account may open a separate account under their Special Non-Resident Rupee Account through which all receipts and payments pertaining to trading/investment in exchange traded derivative contracts will be made ( including initial margin and mark to market settlement, transaction charges, brokerage etc .). Further, transfer between the Special Non-Resident Rupee Account and the separate account maintained for the purpose of trading in exchange traded derivative contracts can be freely made. However, repatriation of the rupee amount will be made only through their Special Non-Resident Rupee Account subject to payment of relevant taxes. The Authorised Dealer banks have to keep proper records of the above mentioned separate account and submit them to Reserve Bank as and when required. FIIs are allowed to offer foreign sovereign securities with AAA rating as collateral to the recognised Stock Exchanges in India for their transactions in derivatives segment subject to SEBI guidelines. In order to accept the securities as collateral, recognised Stock Exchanges have to take RBI approval under FEMA. AD banks can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments. Rebooking of cancelled forward contracts is allowed up to a limit of 2% of the market value of the entire investment of FIIs in equity and / or debt in India. The limit for calculating the eligibility for rebooking will be based upon market value of the portfolio as at the beginning of the financial year (April – March). The outstanding contracts have to be duly supported by underlying exposure at all times. The AD Category - I bank has to ensure that (i) total forward contracts outstanding does not exceed the market value of portfolio and, (ii) forward contracts permitted to be rebooked does not exceed 2% of the market value as determined at the beginning of the financial year. The monitoring of forward cover is to be done on a fortnightly basis. SEBI registered FIIs / sub-accounts are allowed to keep with the Trading Member / Clearing Member amount sufficient to cover the margins prescribed by the Exchange / Clearing House and such amounts as may be considered necessary to meet the immediate needs. FIIs/sub-accounts can open a Foreign Currency denominated Account and / or a Special Non-Resident Rupee Account for the purpose. They can transfer sums from the foreign currency account to the rupee account for making genuine investments in securities in terms of the SEBI (FII) Regulations, 1995. The sums may be transferred from foreign currency account to rupee account at the prevailing market rate and the Authorised Dealer bank may transfer repatriable proceeds (after payment of tax) from the rupee account to the foreign currency account. The Special Non-Resident Rupee Account may be credited with the proceeds of sale of shares / debentures, dated Government securities, Treasury Bills etc., dividend, income received by way of interest, forward contracts booked etc., by compensation received towards sale / renouncement of right offerings of shares and income earned on securities lent under SEBI’s Securities Lending Scheme, 1997 after deduction of appropriate tax, if any. Such credits are allowed, subject to the condition that the Authorized Dealer bank should obtain confirmation from the investee company / FII concerned that tax at source, wherever necessary, has been deducted from the gross amount of dividend / interest payable / approved income to the share / debenture / Government securities holder at the applicable rate, in accordance with the Income Tax Act. The Special Non-Resident Rupee Account may be debited for purchase of shares / debentures, dated Government securities, Treasury Bills etc., and for payment of fees to applicant FIIs’ local Chartered Accountant / Tax Consultant where such fees constitute an integral part of their investment process.

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-2008/18 · issued 02 Jul 2007. The plain-English explanation above is BankPulse’s own independent summary.