53 percent of NRIs believe that domestic investments offered better returns
NRI’s who seek investment opportunities, with their excess capital, in their home country should know about the detailed regulations set by RBI and must consider prior.
- Foreign Direct Investment (FDI) Policy:
- Sector Categories:
Automatic Route: Most startups – related sectors are covered under Automatic Route which make it easier for NRI to invest.
Government Route: Requires prior approval for some sectors, most startups unlikely to fall under this category.
Prohibited Sectors: Where No FDI is allowed.
- Opportunities Across Industries: Technology, healthcare, education, etc.
2. Eligible Investment Instruments:
- Instruments which are Considered as FDI in India:
– Equity shares
– Fully and mandatorily convertible preference shares and
– Fully and mandatorily convertible debentures, among others. - Funds can be Sourced from various accounts:
– Foreign bank accounts
– NRE/FCNR(B) accounts
– investments from person residing outside india including NRI. - Understanding Investment Limits:
– Some Start-ups have ceiling Limits 10% of Total paid-up Capital while other start-ups could go up to 24% of paid-up capital.
– If an investor is an individual NRI investment is capped at 5% of total paid-up capital.
– NRI should ensure all the investment’s compliance to avoid regulatory issues.
4. Convertible Instruments in India
– Must have a Valuation Certificate to determine fair value at the time of issuance of such instrument.
– Conversion price should not be lower than the fair value at the time of issue of the instrument, following the guidelines set by the Foreign Exchange Management Act (FEMA) for unlisted companies or SEBI (Issue of Capital and Disclosure Requirements) Regulations for listed companies - Subscription to Memorandum of Association
– NRI Investors who subscribe to the MOA of an Indian company as initial subscribers, they may invest at face value, which is a standard practice for startup founders as well as early investors in India
5. Pricing Guidelines
The pricing of FDI instruments must adhere to specific guidelines
– Companies listed on recognized stock exchanges: like BSE, NSE the price is determined according to the guidelines laid down by SEBI (Securities and Exchange Board of India)
– For Unlisted Companies: a fair valuation is calculated by a SEBI registered Category – I Merchant Banker or a Chartered Accountant using the Discounted Free Cash Flow Method (DCF)
For the Transfer of Shares from the Resident to NR, a fair market price for the shares or debentures of Indian companies that they acquire should be paid by NRI’s or Foreign Investors as per the pricing guidelines set by RBI.
6. Repatriation Options
NRI Investors have the option to choose between two types of accounts to execute their investments in Indian startups
– NRO Account: It is a Non- repatriable account, where funds cannot be freely transferred to the country of NRI Residence except under the scheme of one million.
– NRO Account has income generated within the borders of India from investment, Rentals, etc
– NRE Account: It is a Repatriable account, which allows NRI investors to repatriate investment proceeds to their home country.
