In the presentation of the Union Budget for the year 2019, Union Minister of Finance, Nirmala Sitharaman put forth the ambitious plan of taking India from the current $2.8 trillion economy to reach the $ 5 trillion mark by the year 2024. The Finance Minister acknowledged the role of non-resident Indians in uplifting the Indian economy. To woo further NRI investments, she announced a slew of benefits to woo NRI investors to enhance investments in their homeland .
- Finance Minister propose merger of PIS and FPI route to establish a uniform investment regime for all foreign investors.
- Know your customer (KYC) norms are set to be eased for FPIs to facilitate fund raising opportunities for voluntary organisations and social enterprises.
- Annual Global Investors Meet being contemplated with National Infrastructure Fund as an anchor.
- Aadhar on arrival for NRIs with valid Indian passport, 180 days mandatory wait to be done away with.
- Amendment of Section 56, sub section (2) makes gifts from relatives exceeding the value of Rs 50,000 taxable in the hands of an NRI.
The Finance Minister’s attempt at the appeasement of foreign investors is justified. In the previous financial year, NRI investment in the real estate sector alone reached the $ 10 billion mark. In the current year NRI investments are expected to rise by another 15%. With India targeting a double digit growth, the Indian Government feels that the time is ripe for NRI investors to consider investing in the Indian capital markets.
The Finance Minister referred to a range of new financial instruments such as Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (ReITs). These instruments have already generated palpable interest among global investors already. In this context, the Finance Minister also announced that the Government is contemplating an annual global investors meet using the National Infrastructure Fund as an anchor to invoke interest of global stakeholders in the Indian markets.
Merger of PIS and FPI route
To encourage NRI investment further in instruments such as these and capital markets in general, the Finance Minister has thus proposed the merger of NRI portfolio investment scheme (PIS) route with the Foreign Portfolio Investment (FPI) route. This merger is envisaged to establish a uniform investment regime for all foreign portfolio investors. Further, know your customer (KYC) norms are set to be eased for FPIs, to allow voluntary organisations and social enterprises raise funds from Indian markets.
Current investment rules
Currently NRIs can invest only through their designated bank accounts that are regulated by the Reserve Bank of India’s PIS. If they hold an non-resident external Rupee (NRE) account, they can also make investments in real estate or fixed deposits of Indian commercial banks. FPI on the other hand refers to the grouping of various asset classes such as stocks bonds and cash equivalents that can either be held directly or manged through a custodian bank.
Complexities that exist
While the merger of the two routes is expected to boost foreign investments in the country, the merger is not expected to be seamless. Many complexities need to be ironed out first. For instance, investment limits work differently for FPIs and NRIs investing through PIS. In several sectors FPI investment up to 100% is allowed, while in certain sectors such as banking, the limit is 74%. NRIs on the other hand cannot own more than 24% in a listed entity.
Then there are other logistical issues such as the need of a license. FPI route mandates a license for only three years with a cost, while NRIs can simply seek to open an account with a domestic broker without the need of any license. For now thus, the Finance Minister’s announcement is expected to cause some sort of regulatory haze before the benefits begin to benefit the economy.
Aadhar on arrival
Further, the Union Budget, brought in cheer for NRIs who hold Indian passports. The Finance Minister announced its decision to do away with mandatory wait of 180 days for the issue of an Aadhaar card for NRIs with valid Indian passports. Such NRIs will be issued an Aadhaar on arrival. This move is expected to help NRIs to a great extent as Aadhaar card acts as both as an identity and address proof as it contains both demographic and biometric data.
Resolution of ambiguities on gift tax
While on the one hand, the Budget attempted to woo NRI investors, it also resolved ambiguities with regards to gift tax applicable to NRIs, through the amendment to Section 56, sub section (2) that comes into effect from April 1, 2020. This amendment now makes it mandatory for recipients (NRI) to disclose gifts of any kind (apart from blood relations and specified relatives) such as stocks, cash or property exceeding Rs 50,000 taxable in the hands of an NRI if they originate in India. While this may seem like a dampener on the face of it, it shows the intent of the Government to increase transparency and compliance in tax laws. Due to a loophole in the word play of the existing tax laws there was rampant misuse of the gifting route to transfer funds and property to NRIs who could claim it as non-taxable.
Finally, all these announcements are geared towards grabbing greater eyeballs of NRI investors and encourage them to deploy their funds into their homeland. But for now, the devil lies in the details, and time will tell how complexities are ironed out between RBI and SEBI on the issues of merger of the PIS and FPI route. Watch this space for more details as they emerge.