In a throwback to the years prior to 2003, Foreign Limited Companies (OCBs) as a vehicle for Non-Resident Indian Investments (NRIs) in India are set to make a comeback. This follows the recent decision to relax foreign direct investment (FDI) standards according to which investments by companies, trusts and partnerships, owned and controlled by NRIs (on a non-repatriation basis), must be treated as national investments. Indeed, this indirectly recognizes OCB as a category of investor entity – something that was derecognized in September 2003.
âIt level the playing field for NRI investors,â says Girish Vanvari, tax manager at KPMG in India. In addition to investing directly in their individual capacity, NRIs may also use any other foreign entity owned and controlled by them to make the investment. “The investment of such an entity will receive the same treatment as that accorded to NRI investments,” said Lalit Kumar, partner at law firm J Sagar Associates.
According to the Foreign Exchange Management Act, no tariff and sector restrictions apply if the investment is made by NRI on a ânon-repatriation basisâ. Until 2003, OCBs benefited from the investment facilities available to NRIs. However, cases of âOCB purchasesâ by investors have prompted the government to use this route as a vehicle for NRI investments. After derecognition in 2003, these entities could only invest on a repatriable basis, like any other foreign investor.
Tax experts and corporate lawyers note that NRIs will now have more options to structure their investments in India. This would “allow NRIs investing on a non-repatriation basis to restrict their Indian investments and have the flexibility to invest through different entity structures depending on business and strategic considerations, administrative convenience, tax efficiency. Law firm Nishith Desai Associates said in a note to clients, while commenting on the recent relaxation of FDI standards.
Experts noted that investments made by such NRI entities on a non-repatriation basis should not be included when determining whether an Indian company is a foreign-owned company. “From the point of view of downstream investments in companies engaged in sectors subject to sectoral ceilings or to FDI specific conditions or approvals, the existing limitations may not apply in the case of Indian companies having invested by such entities “, adds the note.
According to experts, such an investment on a non-repatriation basis does not attract sectoral caps, deposit requirements, pricing guidelines, cap on the coupon rate in the case of convertible instruments, such as Mandatory Convertible Debentures and Mandatory Convertible Preferred Shares, which apply to regular investments.
Experts allay fears that the decision to re-establish OCBs as an NRI investment vehicle will lead to âOCB purchasesâ. According to Akash Gupt, Leader (Regulatory Services) at PwC India, the regulatory environment in 2015 is very different from that of 2003. âRobust KYC (Know Your Customer) standards are in place, while regulatory arbitrage has declined “, says Gupt.
It is not known whether the government would want NRIs to own 100 percent of the capital of such an entity, or would allow a minimum holding of 60 percent, with the balance being held by other investors, as was the case in the OCB plan before 2003.