India has witnessed a steady inflow of capital from its global diaspora and investments by Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in Indian businesses continue to play a significant role in strengthening the country's economy.
Recognizing this, the Government of India has put in place a well-defined regulatory framework under the Foreign Exchange Management Act, 1999 (FEMA) to facilitate and monitor such investments. Specifically, Schedule IV read with Rule 12(2) of the FEMA (Non-Debt Instruments) Rules, 2019 provides the enabling provisions for NRIs and OCIs to invest in the capital of partnership firms or sole proprietorships in India.
|
Basis |
Non-Resident Indian |
Overseas Citizen of India |
|
Section or Rule |
Rule 2 (aj) of FEM (Non-Debt Instruments) Rules, 2019 |
Rule 2 (ak) of FEM (Non-Debt Instruments) Rules, 2019 |
|
Meaning |
Means an individual resident outside India who is a citizen of India. |
OCI means an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under section 7A of the Citizenship Act, 1955 (57 of 1955). |
|
Passport status and citizenship |
He holds an Indian passport |
He is not a citizen of India and does not hold an Indian Passport |
Legal Framework
The primary legislation and regulations governing NRI/OCI investment in partnership firms in India include:
- Foreign Exchange Management Act, 1999 (FEMA).
- FEMA (Non-Debt Instruments) Rules, 2019.
- FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
- Reserve Bank of India (RBI) Master Directions on Foreign Investment in India.
- Income Tax Act, 1961 (for taxation aspects).
Mode of Investment
A Non-Resident Indian (NRI) or Overseas Citizen of India (OCI) may invest in the capital of a firm or sole proprietorship in India subject to the following conditions:
- Investments can be made by inward remittance through normal banking channels or by debit to NRE/FCNR(B)/NRO accounts maintained with authorized dealers/authorised banks in India.
- If the investment is on:
- Non-Repatriation Basis: Permissible without RBI approval.
- Repatriation Basis: Prior RBI approval is required.
Prohibited Sectors
Investment is not allowed in sectors prohibited for foreign direct investment, such as:
- Lottery business
- Gambling and betting
- Chit funds
- Nidhi companies
- Real estate business (excluding development of townships and construction of residential/commercial premises)
- Agriculture or plantation activities or print media sector (except under specified conditions)
Key points to keep in mind
- Only NRIs/OCIs in their individual capacity can invest.
- No foreign company, foreign trust, or non-individual foreign entity is permitted to invest in partnership firms.
- Even Power of Attorney holders acting on behalf of NRIs cannot invest unless the remitter is the NRI/OCI themselves.
- NRIs/OCIs cannot extend loans to Indian partnership firms without RBI approval.
Reporting Requirements
- For repatriation basis investments: The firm must file Form FC-GPR/FC-TRS (as may be applicable) and other reporting forms as per the RBI's reporting guidelines.
- For non-repatriation investments: No specific reporting is currently mandated under the RBI framework, though firms must maintain proper documentation.
Sale/ Maturity proceeds
- Regardless of the kind of account from which the consideration was paid, the disinvestment proceeds will only be credited to the individual's NRO account;
- The sum contributed along with any capital appreciation that results, cannot be repatriated overseas.
FAQs on Investment by NRI/OCI in Partnership Firms in India
Que-1 Is investment in an unregistered partnership firm permitted for NRIs/OCIs?
Answer: Yes, Investment is allowed in both registered and unregistered firms, provided all FEMA conditions are met. [Rule 12 or Schedule IV of FEMA (Non-Debt Instruments) Rules, 2019.]
Que-2 Is investment allowed through Power of Attorney (POA) holders on behalf of NRIs/OCIs?
Answer: No. Investment must be made directly by the NRI/OCI. A POA holder cannot invest in a partnership firm on behalf of an NRI/OCI. (RBI Master Direction on Foreign Investment in India, Para 4.2)
Que-3 Is PAN mandatory for the NRI/OCI partner in the firm?
Answer: Yes. A PAN is required if the NRI/OCI partner earns taxable income /profit earned in India. (Rule 114 of the Income Tax Rules, 1962 and RBI Master Circular on Remittance of Assets)
Que-4 Is investment allowed through escrow or trust structures for NRIs/OCIs in partnership firms?
Answer: No. Investment must be made directly by the NRI/OCI individual. Use of trust, escrow, or intermediary foreign entities is not permitted. (RBI Master Direction on Foreign Investment in India, Para 4.2)
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
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