RESERVE BANK OF INDIA
EXCHANGE CONTROL DEPARTMENT
CENTRAL OFFICE
MUMBAI 400 001

A.D. (M.A. Series) Circular No.28 August 14, 1998

To

All Authorised Dealers in Foreign Exchange

Dear Sirs,

Enhancement in the existing limits for investments by

FIIs/NRIs/OCBs in Indian companies

With a view to encouraging foreign investment in Indian companies as also investment by Foreign Institutional Investors (FIIs) in the primary/secondary markets in India by NRIs/OCBs through stock exchanges under the Portfolio Investment Scheme, it has been decided to modify the ceiling limits up to which they are presently permitted to invest in Indian companies as laid down in Chapter 10 of the Exchange Control Manual (ECM). The revised limits are indicated below:

Paragraph of Subject Nature of modifications made

ECM

1) 10B.4(i) Investment by FIIs (a) The ceiling of 24% on FII investment in primary and secondary markets in primary and secondary markets in the

paid up equity capital can be enhanced to 30% by the Indian company subject to approval by the Board of Directors of the company and by passing a Special Resolution to that effect by the General Body.

(b) The ceiling on holding of a single FII or the concerned FII group in any Indian company has been raised from 5% to 10% of total paid up equity capital.

(c) The aggregate ceiling for FII investment i.e.24% or 30%, as the case may be, will not hereafter include investments made by NRIs/OCBs under the Portfolio Investment Scheme.
10C.21(ii) Portfolio Investment The existing overall ceiling of (a) 5 per 10C.23 in shares/debentures cent of the total paid up equity capital of of Indian companies the company concerned and (b) 5per cent of by NRIs/OCBs- the total paid up value of each series of General conditions the convertible debentures issued by the For Purchases company to all non-resident investors taken together both on repatriation and on non- repatriation basis has since been raised to 10%.

3) 10C.21(iv)Portfolio Investment The general permission granted by Reserve by NRIs/OCBs on Bank to the designated branch of an non-repatriation authorised dealer to purchase basis shares/debentures on non-repatriation basis on behalf of NRI/OCB investors is valid for a period of five years subject to certain conditions. Authorised dealers may hereafter renew the general permission granted by Reserve Bank to individual NRIs for a further period of five years at a time. However, applications for renewal of general permission granted to OCBs should be referred to Reserve Bank.

4) 10C.21(v)Portfolio Investment (a)Reserve Bank grants general permission to the designated branch of an authorised dealer for purchase of shares/debentures on repatriation basis on behalf of NRIs/OCBs for a period of five years subject to certain conditions. Authorised dealers may hereafter renew the general permission already granted by Reserve Bank to individual NRIs for a further period of five years at a time. Applications for renewal of general permission to OCBs should, however, be referred to Reserve Bank.

(b) Investment made by any single non-resident investor in equity/preference shares and convertible debentures of any listed company is presently subject to a ceiling of 1 per cent of the total paid up equity or preference capital or 1% of the total paid-up value of each series of convertible debentures of the Indian company. This limit has since been raised from 1% to 5%. 2. The following consequential amendments may be carried out in the Exchange Control Manual. (i) Paragraph 10B.4 may be replaced as per Slip 1. (ii) Paragraph 10C.21 may be replaced as per Slip 2. (iii) Paragraph 10C.22 may be replaced as per Slip 3. (iv) Paragraph 10C.23 may be replaced as per Slip 4.

3. Authorised dealers may bring the contents of this circular to the notice of their constituents.

4. The directions contained in this circular have been issued under Section 73(3) of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any contravention or non-observance thereof is subject to the penalties prescribed under the Act.

Yours faithfully,

KHIZER AHMED

Chief General Manager

Slip 1

AD/MA 28/1998

Investment by Foreign Institutional Investors

(i) Foreign Institutional Investors (FIIs) including pension funds, mutual funds, investment trusts, university funds, endowments, foundations or charitable trusts or charitable societies, etc. are permitted to invest in all securities i.e. equity shares/debentures/PCDs/FCDs/Rights renunciations/warrants of Indian companies listed as well as unlisted, dated Government securities, Treasury Bills and units of domestic mutual fund schemes in the primary and secondary markets. Investments by FIIs will be subject to a ceiling of 24% of the total paid up equity capital of the company. The ceiling would apply to all holdings taken together including conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII or the concerned FII group in any company would also be subject to a ceiling of 10% of total paid-up equity capital. Indian companies, however, would be permitted to raise the ceiling limit of 24% to 30% provided it has been approved by the Board of Directors of the company and a Special Resolution is passed to that effect by the General Body. The ceiling of 24% or 30%, as the case may be, applicable for investment by FIIs will not include investments made by NRIs/OCBs under the Portfolio Investment Scheme. It will also not include direct foreign investment by a foreign collaborator and investment by FIIs through Off-shore Funds, Global Depository Receipts and Euro-Convertible Bonds.

(ii) FIIs are required to register themselves with Securities and Exchange Board of India (SEBI) before they invest in the Indian capital market. Application for registration should be made by FIIs to SEBI in the prescribed form in duplicate. One copy of the application will be forwarded by SEBI to Reserve Bank. Reserve Bank will grant permission under FERA 1973 to the bank branch designated by the applicant FII to buy/sell equity shares/debentures/warrants/dated Government securities/Treasury Bills/units of domestic mutual funds. Reserve Bank's permission will be initially valid for five years and will be operative only after obtaining registration from SEBI. This permission can be renewed for a further period of five years on request. Reserve Bank's permission would enable the FIIs to buy/sell the securities and remit the income/dividend/sale proceeds after payment of applicable taxes through the designated bank branch. Reserve Bank's permission will also cover investment in shares/debentures of Indian companies in primary market i.e. new issues provided the company has reserved certain quota out of its public issue in favour of FIIs. The designated bank branch is required to submit to Reserve Bank a statement in form LEC(FII) on daily basis in respect of purchases/sales of shares/debentures made for the purpose of monitoring by Reserve Bank the overall ceiling of 24% or 30%, as the case may be, referred to in sub-paragraph (i).

(iii) In order to facilitate making of investments in India and repatriation of income/sale proceeds of such investments, Reserve Bank will permit the designated bank to open a foreign currency denominated account and a special Non-resident Rupee account in the name of FII. The designated bank branch will also be permitted (a) to transfer funds from foreign currency account to rupee account and vice versa, (b) to make investments out of the balance in the rupee account, (c) to credit sale proceeds of shares and other investments as also dividend/interest earned on the investments to the rupee account and (d) to transfer the repatriable proceeds (net of taxes) from the rupee account to the foreign currency account.

Slip 2

AD/MA 28/1998

General Conditions for Purchase with

Repatriation or Non-Repatriation rights

(i) NRIs/OCBs will be permitted to make portfolio investment in shares/debentures (convertible and non-convertible) of Indian companies, with or without repatriation benefits provided the purchase is made through a stock exchange and also through designated branch of an authorised dealer. NRIs/OCBs are required to designate only one branch authorised by Reserve Bank for this purpose.

(ii) Investment in equity shares and convertible debentures will be permitted subject to an overall ceiling of (a) 10 per cent of the total paid-up equity capital of the company concerned; and (b) 10 per cent of the total paid-up value of each series of the convertible debentures issued by the company concerned for all NRIs/OCBs taken together both on repatriation and on non-repatriation basis. [See paragraph 10C.23(ii) in respect of investments in excess of the limit of 10%].

(iii) The purchase of shares and debentures under the scheme is required to be made at the ruling market price.

(iv) NRIs/OCBs intending to invest on non-repatriation basis should submit the application in form NRI and NRC respectively, through a designated branch of an authorised dealer, to Reserve Bank (Central Office). Reserve Bank will grant general permission to the concerned authorised dealer to purchase shares/debentures on behalf of the NRI/OCB subject to the condition that the payment for such investment is received through inward remittance or from the investor's NRE/FCNR/NRO Account. The general permission granted by Reserve Bank would be initially valid for a period of five years. Authorised dealers may themselves renew the permission granted by Reserve Bank to individual NRIs for a further period of five years at a time. Applications for renewal of general permission granted to OCBs may, however, be referred to Reserve Bank.

(v) NRIs and OCBs intending to invest with repatriation benefits should submit the application through a designated branch of authorised dealer in form RPI and RPC respectively. Reserve Bank will grant general permission to the designated branch for purchase of shares/debentures subject to the conditions that-

(a) the payment is received through an inward remittance in foreign exchange or by debit to the investor's NRE/FCNR account.

(b) investment made by any single NRI/OCB investor in equity/preference shares and convertible debentures of any listed Indian company does not exceed 5% of its total paid-up equity or preference capital or 5% of the total paid-up value of each series of convertible debentures issued by it.

(c) NRIs/OCBs take delivery of the shares/convertible debentures purchased and give delivery of the shares/convertible debentures sold under the Scheme.

The general permission granted by Reserve Bank will be valid initially for a period of five years. Authorised dealers may themselves renew the permission granted by Reserve Bank to individual NRIs for a further period of five years at a time. Applications for renewal of general permission granted to OCBs may, however, be referred to Reserve Bank

(vi) NRIs/OCBs intending to invest in the units of domestic mutual funds on non-repatriation/repatriation basis under the Portfolio Investment Scheme should apply to Reserve Bank (Central Office) in the manner indicated in sub-paragraphs (iv) and (v) above. However, approvals already granted for portfolio investment in shares/debentures of Indian companies will also be valid for purchase of units of domestic mutual funds.

Slip 3

AD/MA 28/1998

Registration of Shares & Investment in Joint Names

10C.22 (i) Shares/debentures purchased by NRIs/OCBs should be held and registered in the names of either the investor himself or an authorised dealer or the latter's nominee/s

(ii) Shares/debentures can be purchased by NRIs in joint names with other NRIs with permission of Reserve Bank. In such cases, if the investment is with repatriation benefits, the first holder is to be treated as investor for the purpose of 5% ceiling. The second or third holder will be eligible to invest separately in the same company in his own name as the first holder in joint holdings up to the limit of 5%. Reserve Bank will also permit investment jointly with residents. However, if the resident joint holder inherits the shares/debentures, he/she will not be entitled to repatriation benefits.

Slip 4

AD/MA 28/1998

Procedure for Monitoring the Overall Ceilings

10C.23 (i) Reserve Bank (Central Office) will monitor the overall ceiling of 10% on the acquisition of shares/debentures by NRIs/OCBs under the Portfolio Investment Scheme with the assistance of link offices of authorised dealers in Mumbai. The link offices should submit a statement in form LEC (NRI) giving details of purchases/sales of shares/debentures (company-wise) made by all designated branches on daily basis. The daily statement should be serially numbered. All purchase and sale transactions for which commitments have been made(as evidenced by contract notes issued by recognised stock exchange brokers) irrespective of whether the actual deliveries have been effected or not should be included in the daily statement. Sales where shares/debentures were originally purchased by the NRI/OCB investors through stock exchange should only be included in the statement. If no transactions are effected on any day, a 'nil' statement need not be submitted.

(ii) Indian companies listed on recognised stock exchanges in India may, however, resolve by a General Body Resolution to allow NRIs/OCBs to acquire shares/debentures up to 24% instead of the 10% mentioned in paragraph 10C.21(ii). Indian companies desirous of exceeding the limit of 10% should, therefore, forward the necessary resolution to Reserve Bank indicating that the General Body has no objection to NRIs/OCBs purchasing shares/debentures up to 24% of the paid up capital/paid up vakue of each series of convertible debentures. On receipt of the resolution, the name of the company will be intimated to all link offices of designated branches of authorised dealers to enable them to make purchases on behalf of their clients up to the raised/revised limit in respect of the company.