1. Queries

Can a Person resident outside India (PROI) [Section 2(v) of FEMA, 1999] who is a Non Resident Indian (NRI) engage himself into business of retail trading in India?

2 Discussion

Investment in India generally and particularly foreign investment by Person Resident Outside India (PROI) is a capital account transaction regulated

a) by Government through Foreign Direct Investment (FDI) Policy (popularly known as sectoral policy) issued by the Government under Industrial Development (Regulation) Act, 1951; and

b) by Reserve Bank of India through regulations in the form of various notifications issued under FE MA FDI Policy regulates the foreign investment in India through policy measures which enlist the sectors wherein foreign investment is a) prohibited,

b) permitted with Government approval

c) permitted under automatic route upto certain limit in a specified sector/activity with conditions specified therein

d) permitted under automatic route upto 100% with conditions

“Foreign Direct Investment” is not defined under FEMA or under the Government policy. However it appears only as a head note of Schedule 1 to Notification No. FE MA 20/RB dt. 3-5-2000 (cited as Notification No. 20). In common parlance any investment which is not a portfolio investment is described as direct investment. Thus for the purpose of this opinion, inter alia, any investment made by PROI in accordance with Schedule 1 can be treated as foreign direct investment

2.1 Prohibitions under FDI Policy

FDI policy is a superior legislation and Consolidated FDI policy, Circular No. 1 of 2010 dt. 31st March 2010 prohibits FDI in following activities/sectors

a) Retail Trading (except single brand product retailing)

b) Atomic Energy

c) Lottery Business including Government/private lottery, online lotteries, etc.

d) Gambling and Betting including casinos etc.

e) Business of chit fund

f) Nidhi Company

g) Trading in Transferable Development Rights (TDRs)

h) Real estate business, or construction of farm houses

i) Activities/sectors not opened to private sector investment

Besides foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities.

2.2 Regulations under FEMA

Foreign Exchange Management Act, 1999 (FEMA) through various notifications regulates the transactions, whether it be a current account transaction [section 2(j) of FEMA] or a capital account transaction [section 2(e) of FEMA].

Notification No. 1 of FE MA prohibits investment in India, in any form, in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage -

a) in the business of chit fund, or

b) as Nidhi Company, or

c) in agricultural or plantation activities or

d) in real estate business, or construction of farm houses or

e) in trading in Transferable Development Rights (TDRs).

Explanation:

For the purpose of this regulation, “real estate business” shall not include development of townships, construction of residential/commercial premises, roads or bridges.

The prohibitions stated in Notification No. 1 is the list of capital account transactions of PROI which are prohibited, however it does not specifically provide for prohibition of retail trading in India by PROI.

Notifications stipulating conditions and restrictions on foreign investment under various modes are issued by RBI under Notification No. 20, Notification No. 22 & Notification No. 24.

Notification No. 20 stipulates foreign investment in Indian companies under various modes such as FDI, portfolio investment by foreign institutional investor (FII), portfolio investment by NRIs, investment by NRIs on non repatriation basis, investment in securities other than shares or convertible debentures, investment in an Indian Venture Capital Undertaking (VCUs) by a registered foreign venture capital investor (FVCI).

Notification No. 22 regulates establishment in India of branch or office or other place of business by PROI and Notification No. 24 regulates foreign investment in firm or proprietary concern in India by NRIs on a non repatriation basis.

The provisions of various notifications issued by RBI may be tabulated below

Sr.No.	Notification/Regulation	Modes of investment	Prohibitions on activity
1.	Notification 20
	Schedule 1	Foreign Direct Investment	a) Retail Trading (except single brand product retailing) b) Atomic Energy c) Lottery Business d) Gambling and Betting e) Housing and Real Estate business f) Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc.
	Schedule 2	Portfolio investment by FIIs	--
	Schedule 3	Portfolio investment by NRIs	--
	Schedule 4	Investment by NRIs on non repatriation basis	Indian company being a) a Chit Fund or a Nidhi company; or b) engaged in agricultural/plantation activities or real estate business or construction of farm houses; or c) dealing in Transfer of Development Rights
	Schedule 5	Investment in securities other than shares or convertible debentures	--
	Schedule 6	Investment in Indian VCUs by FVCI	–
2.	Notification 22	Establishment of branch or office or other place of business in India	Retail Trading
3.	Notification 24	Investment by NRIs on non repatriation basis, in proprietary concern or partnership firm in India	Any agricultural / plantation activity or real estate business or print media

Thus it may pertinently be noted that regulations are different for one mode of investment as distinguished from another, particularly one may find that prohibited activity or sectors under each mode of investments are different. Annexure A to the Schedule 1 (sectors / activity applicable in case of FDI in Indian companies) of Notification 20 prohibits FDI in following sectors

a) Retail Trading (except single brand product retailing)

b) Atomic Energy

c) Lottery Business

d) Gambling and Betting

e) Housing and Real Estate business

f) Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisiculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)

However Schedule 4 of Notification 20 on investment by Non-Resident Indians (NRIs) on non repatriation basis prohibits investment in Indian company which is a) a Chit Fund or Nidhi company, or b) engaged in agricultural/plantation activities or real estate business or construction of farm houses, or c) dealing in TDRs Notification 24 prohibits investment in the firm or the proprietary concern engaged in any agricultural/ plantation activity or real estate business or print media.

While FDI Policy of the Government regulates investment in general, including investment by domestic entities and foreign investment; FEMA deals with regulations in relation to foreign investment. It may be interesting to note that a) the provisions / regulations for NRI investment is covered under schedule 3 for portfolio investment, schedule 4 for investment on non-repatriation basis in Indian companies, notification 22 as activities of branch, notification 24 as proprietary concern or partnership firms b) none of these regulations prohibits activity of retail trading except that retail trading is prohibited only under schedule 1 which deals with FDI in Indian companies on repatriation basis Thus question arises as to whether NRIs can invest in Indian companies or proprietary concern or partnership firms engaged in retail trading, on non repatriation basis.

2.3 Regulations pertaining to Single brand retail trading in India

It may be noted that Single brand retail trading is specifically excluded from the list of prohibited items i.e., it is permitted as FDI. The FDI Policy in respect of Single brand retail trading is issued by Press Note No. 3 (2006 Series).

3. Analysis of the FDI Policy and regulations under FEMA

FDI Policy is the genus of the regulations under FEMA to regulate the foreign investment and to provide for its procedure and relevant documentations. The policy does permit certain activity or investment through one of the mode of investment, however, not through other or another mode of investment. Thus distinction has been made between modes of investment for the purposes of allowing certain activity or prohibiting that activity/ies.

For e.g. while particular activity may be permitted under portfolio scheme, but same is not permitted under FDI scheme of schedule 1.

The prohibitions stated in the sectoral policy are therefore applicable to FDI. Under FEMA in a case where mode of investment is FDI, such prohibitions as referred to in policy are to be read with the regulations under FEMA in respect of FDI only. Therefore in case of “Foreign Direct Investment”, prohibitions as stated in the policy as well as stated under various schedules of Notification No. 20 will be applicable.

Now therefore question arises as to whether activity of NRI as permitted under schedule 4 on non repatriation basis constitutes “FDI”?

It may be interesting to note that to constitute FDI,what is important is to examine

a) whether investment is made by a PROI, irrespective whether it is on a repatriation basis or not, and

b) that is it a direct investment, not being a portfolio investment.

It is obvious and clear that investment under schedule 4 of the notification 20 of FEMA and that under notification 24 are in the nature of FDI, whereas the one which is specified under schedule 3 are not in the nature of direct investment.

Therefore “retail trading activity” may be permitted under schedule 3 but not under schedule 4 or under notification 24, which deals with FDI.

Thus in our opinion NRIs cannot invest on non repatriation basis, in Indian companies or proprietary concern or partnership firm engaged in multi brand retail trading, irrespective of the fact that there is no specific prohibition under those specific notifications.

However NRIs can make portfolio investment in such Indian companies engaged in multi brand retail trading business.

4. Conclusion

a) NRIs cannot make “direct investment” in any form in companies or proprietary concern or partnership firms engaged in multi brand retail trading in India, however they can make portfolio investment in accordance with provisions of schedule 3 to the Notification 20.

b) NRIs can make direct investment upto 51% with Government approval, in an Indian company engaged in single brand retail trading in India on a repatriation basis

c) NRIs may invest upto 100% on non repatriation basis in Indian companies or proprietary concern or partnership firms engaged in Single brand retail trading, provided other conditions contemplated in Schedule 4 to Notification 20 or Notification 24 as the case may be are complied with.