Can Resident Indians incorporate a Company/LLC outside India

I am being asked this query on almost daily basis by my friends and colleagues  and all of them are of view that incorporation of Companies/LLC outside India is permitted in FEMA by RBI under Liberalized Remittance Scheme, 2004. To get the answer of this question we need to understand the Liberalized Remittance Scheme, 2004.

Let us see what RBI has to say in the matter:-

1. What is the Liberalised Remittance Scheme of USD 200,000?

Ans.  Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 200,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

Q.2. Please provide an illustrative list of capital account transactions permitted under the scheme.

Ans..  Under the Scheme, resident individuals can acquire and hold immovable property or shares or debt instruments or any other assets outside India, without prior approval of the Reserve Bank. Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the Scheme.

Q. 3. What are the prohibited items under the Scheme?

Ans. The remittance facility under the Scheme is not available for the following:

i) Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000;

ii) Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty;

iii) Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market;

iv)  Remittance for trading in foreign exchange abroad;

v) Remittance by a resident individual for setting up a company abroad;

vi) Remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan;

vii) Remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non co-operative countries and territories”, from time to time; and

viii) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the bank.

It is pretty clear from the aforesaid FAQs put by  RBI that it doesn’t permit incorporation of Company /LLC by an individual under Liberalized Remittance Scheme. However there is no debar on purchase of shares of an existing Company/LLC by a resident Indian under the Liberalized Remittance Scheme