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The recent change in the policy governing investments by non-resident Indians (NRIs) was long overdue. Now, investment by an NRI via the non-repatriable route will be considered domestic investment at par with the investment made by residents.

This clarity was necessary since NRIs were generally classified under the ‘non-resident’ category under the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (the TISPRO Regulations).

Now the general classification of an NRI as a ‘non-resident’ will no longer hold good. The investment route will determine the status of investment by an NRI under the TISPRO Regulations, as to whether the investment is treated as being made by a ‘non-resident’ or a ‘resident’. Going forward, when examining the compliance associated with transfer of securities from or to an NRI, this will be a key factor.

Currently, under TISPRO Regulations, the transfer of securities by an NRI to a resident is considered under the automatic route. However, the transfer of securities by an NRI to a non-resident is considered under the approval route.

With the policy change, if the NRI had invested via the non-repatriable route, transfer of securities to a non-resident will be considered as a transfer from a resident to a non-resident and hence fall under the automatic route requiring only the filing of form FC-TRS.

Conversely, transfer of securities to an NRI by a resident is considered under the automatic route. Transfer of securities to an NRI by a non-resident is considered under the automatic route given the prior general classification of an NRI as a non-resident.

After the change, if the NRI acquires the securities via the non-repatriable route, transfer of securities to an NRI by a resident will be under the automatic route, as between two residents.

Earlier, transfer of securities from one NRI to another NRI was under the automatic route, being between two non-residents. With the deeming resident character now attached to the investment via the non-repatriable route by NRIs, even transfers between two NRIs could trigger an FC-TRS filing and adherence to pricing guidelines.

Classification based on the nature of investment rather than the resident/ non-resident status of the security holder is seemingly a more accurate approach from a foreign exchange regulation perspective.

The consolidated FDI policy effective from May 12, 2015, in fact contemplates this. FDI in partnership firms by non-residents is currently under the approval route. However, the FDI policy permits NRIs or Persons of Indian Origin resident outside India to invest in a partnership firm or a proprietary concern in India on a non-repatriable basis under the automatic route.

NRIs (even when considered as non-residents) were given certain special benefits in sectors such as construction and development of townships, housing and built-up infrastructure. Now with the deemed domestic status for NRIs investing through the non-repatriable route, such NRIs could perhaps enjoy more benefits akin to residents, including in terms of the nature of securities they can subscribe to.

With domestic investments and funds playing a key role, such policy changes are definitely welcome.

The writer is a partner with J Sagar Associates. The views are personal