Legal advisory for NRI and OCI investors in India

Law

FEMA 1999 and NDI Rules 2019

Routes

Repatriable (Schedule 1) or non-repatriable (Schedule 4)

Reporting

FIRMS portal: FC-GPR, FC-TRS, LLP forms

Barred sectors

Agriculture, plantations, real estate business

Repatriable and non-repatriable investment compared

The Foreign Exchange Management (Non-Debt Instruments) Rules 2019 give NRIs and OCI cardholders two main routes into unlisted Indian companies. The choice is usually made at the time of the first investment and is hard to change afterwards, so it deserves thought.

Non-repatriation investment suits a family business where you want flexibility and no FDI paperwork. Repatriation investment suits a startup or venture where you expect an exit and want the money freely back abroad. Partnerships and proprietary concerns can also receive NRI capital on a non-repatriation basis, subject to the sector restrictions. Citizens of countries sharing a land border with India face the additional government approval requirement introduced by Press Note 3 of 2020.

Checking the business before you invest

Friends and relatives are the most common source of NRI investment opportunities, and also the most common source of later disputes. A short legal due diligence costs little compared with the money at stake. We check the company's filings on the Ministry of Corporate Affairs portal, its capital structure and past allotments, any charges on its assets, pending litigation in the courts and tribunals, GST and income tax compliance, the ownership of key assets such as land, trademarks and software, and whether earlier foreign investment was properly reported.

For a startup, we also check founder agreements, ESOP pools, convertible instruments already issued and whether the company holds the registrations its business needs. For a family business being converted into a company with your money, we check that the assets are actually transferred into the company rather than left with a relative. Our page on investing in Indian startups covers early-stage terms in more detail.

Protecting yourself in the documents

An investor who lives abroad cannot watch the business day to day. The shareholders agreement and the articles of association have to do that work. The protections we usually negotiate for NRI investors include:

• a board seat or observer right, with meetings by video and notice by email;
• reserved matters that need your consent, such as new share issues, borrowing above a limit, related-party transactions and sale of key assets;
• pre-emption rights so that you are offered new shares before anyone else, preventing dilution;
• information rights: monthly accounts, annual audited statements and access to bank statements;
• tag-along and drag-along rights, and an agreed exit or buy-back route with a valuation method;
• a dispute resolution clause with arbitration seated in India and hearings permitted online.

Rights in a shareholders agreement must be carried into the articles to bind the company effectively. Where things later go wrong, these documents shape what the NCLT can do; see our page on shareholder disputes and NCLT cases.

FEMA filings and tax after you invest

For repatriable investment, the company must report the allotment on Form FC-GPR through the RBI's FIRMS portal within 30 days, after the authorised dealer bank has received the money and issued its KYC report. Later transfers between residents and non-residents are reported on Form FC-TRS within 60 days. The company also files the annual return on foreign liabilities and assets by 15 July each year. Late filings attract late submission fees and, in serious cases, compounding. Your own obligation is to remit through banking channels and keep the bank's advice.

As a director or significant beneficial owner, you may have obligations of your own: a DIN with annual KYC, disclosures of interest and significant beneficial ownership declarations. On the tax side, dividends from an Indian company are taxable in India with tax deducted at source, subject to treaty relief; capital gains on sale of unlisted shares are taxable in India, and the buyer may be required to deduct tax when paying a non-resident. Our page on NRI income tax and DTAA covers the treaty side.

Other ways NRIs commonly invest

Not every investment is a shareholding in a private company. NRIs can invest in listed Indian shares through the portfolio investment scheme with a designated bank account, subject to individual and aggregate limits; in mutual funds; in government securities on a repatriation or non-repatriation basis; and in LLPs operating in sectors where foreign investment is allowed under the automatic route without performance conditions. Lending to an Indian company is a debt transaction governed by separate rules on external commercial borrowing, and lending to relatives in India is restricted. If you want to set up a new company yourself rather than invest in someone else's, see our page on company registration for foreigners and NRIs.

Returning NRIs face a different question: once you become resident again, your foreign holdings and your Indian investments change status. Investments made on a repatriation basis can generally continue but must be re-designated where required, and accounts must be converted. We help clients plan this before the move.

Documents you need

Share the proposal first. Documents for signing come later, once the structure is agreed.

• Passport and OCI card or foreign passport, and overseas address proof
• PAN card, or we help you apply for one
• Details of your NRE, NRO or FCNR accounts
• The investment proposal, pitch deck or term sheet
• Company name and CIN, or details of the business if not yet incorporated
• Existing shareholders agreement and articles, if any
• Valuation report for repatriable investment (the company usually obtains it)
• Board resolutions and allotment documents (we review them)

How we handle it for you

1. Structure call

   We discuss your goals by video and recommend the route: repatriable, non-repatriable, company or LLP.

2. Due diligence

   We check the business, its filings, litigation and assets, and report the risks in plain language.

3. Documents

   We negotiate the term sheet, shareholders agreement and articles, and prepare documents for signing abroad.

4. Funding and filings

   The money is remitted through the correct account and we make sure FEMA reports are filed on time.

5. Ongoing support

   We review board papers, protect your rights and advise on exit or conversion when you return to India.

Why clients choose ProudLegal

Frequently asked questions