One Sunday afternoon at a coffee shop in south Delhi, I met my friend, Simon, a native of Hamburg, who has been working as a business development manager for an Indian company here for the past two years or so. In the midst of our tête-à-tête, he asked: “I want to put the Indian salary I earn from my job into the LPO (legal process outsourcing) business run by my friend here in India. What should I do?”
I understood his intentions. He wanted to invest some money by holding an equity stake in Raghav's legal process outsourcing company (perhaps not a stock market deal).
As I recalled provisions under the foreign direct investment (FDI) and exchange control laws off-hand, I thought something was amiss as I tried to classify Simon's proposed off-the-market transaction as foreign direct investment. I told him I'll get back to him shortly.
When I checked the provisions, it appears our FDI law does not explicitly foresee a foreign national resident in India making an equity investment in an unlisted Indian company. Even if it does, there seems little clarity on the ways to do it.
FDI is defined as an investment by a non-resident entity or a person resident outside India in the capital of Indian company.
Obviously, this does not encompass or give room to any investments made by a foreign national resident in India.
Besides, any person who stays in India for more than 182 days in the previous financial year for taking up employment or for any business or vocation or for any other purpose that indicates an intention to stay on for an uncertain period is to be characterised as a ‘person resident in India'. Accordingly, even a foreign national may be a person resident in India.
Taking into consideration that Simon resided in India for more than 182 days during the previous financial year and was employed in India, he should undeniably be classified as a person resident in India. Hence, all his investments in Raghav's LPO business should fall outside the purview of FDI and the exchange control scanner.
Obscure guideline
However, the pricing guidelines under the FDI Policy, while laying down requirements for transfer of shares by way of sale under private arrangement from a resident to a non-resident and vice-versa, implies that the term non-resident includes an ‘incorporated non-resident entity other than erstwhile overseas corporate bodies (OCB), a foreign national, a non-resident Indian (NRI) and a foreign institutional investor (FII)'. As a result, this insinuation of foreign national within the expression non-resident makes things obscure.
In the absence of any clarification, this may have adverse implications and would create uncertainties.
What would happen if Simon (a foreign national) chooses to source more funds from his bank account in Germany to purchase shares of the LPO company? Would the authorised dealer (AD) bank while issuing a foreign inward remittance certificate treat the inflow as FDI?
Considering his residency status is that of a person resident in India under the FDI policy, there isn't enough justification for treating his investment as FDI.
If after his equity investment in India he decides to leave the country for good, would such an investment remain an investment by a person resident in India? If yes, until when?
What if he wishes to sell his shares in the LPO company to a resident in India would the sale be deemed as a sale of foreign equity (presuming that he no more enjoys the standing of a person resident in India)? Would the proceeds from such a sale of equity be allowed to be repatriated without permission from the Reserve Bank of India or AD bank? How about a situation wherein Simon, as a person resident in India, opts to invest in a company within an industry having sectoral caps for foreign investors under the FDI policy? Will his subsequent change in category from a resident to non-resident transform his nature of investment too? Would such a conversion expose him to foreign exchange violations?
Untapped Potential
In the quest to find an investment solution for Simon, I recognised that the Government strives to attract foreign equity by crafting pioneering financial instruments and lucrative investment gateways for overseas investors, but it seems to have given little thought to foreign nationals who are residents in India.
Until these puzzles are demystified, Simon may well find himself entangled in this labyrinth without getting to invest his moolah in the Indian market.
(The author is a corporate lawyer working with one of India’s leading law firms.)