Company Act

Introduction

The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or together" and 'Pains' meaning "bread". Originally, it referred to a group of persons who took their meals together. A company is nothing but a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose. Under Halsbury’s Laws of England, the term "company" has been defined as a collection of many individuals united into one body under special domination, having perpetual succession under an artificial form and vested by the policies of law with the capacity of acting in several respect as an individual, particularly for taking and granting of property, for contracting obligation and for suing and being sued, for enjoying privileges and immunities in common and exercising a variety of political rights, more or less extensive, according to the design of its institution or the powers upon it, either at the time of its creation or at any subsequent period of its existence. However, the Supreme Court of India has held in the case of State Trading Corporation of India v/s CTO that a company cannot have the status of a citizen under the Constitution of India.

A company as an entity has several distinct features which together make it a unique organization. The following are the defining characteristics of a company :-

Separate Legal Entity:

On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately.

Limited Liability:

The liability of the members of the company is limited to contribution to the assets of the company upto the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in case of a company once the members have paid all their dues towards the shares held by them in the company.

Perpetual Succession:

A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company.

Separate Property:

A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company's property during the existence of the company.

Transferability of Shares:

Shares in a company are freely transferable, subject to certain conditions, such that no share-holder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.

Common Seal:

A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force.

Capacity to sue and being sued:

A company can sue or be sued in its own name as distinct from its members.

Separate Management:

A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company.

One Share-One Vote:

The principle of voting in a company is one share-one vote. I.e. if a person has 10 shares, he has 10 votes in the company. This is in direct contrast to the voting principle of a co-operative society where the "One Member - One Vote" principle applies i.e. irrespective of the number of shares held, one member has only one vote.

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Distinction between Company and Partnership

1. A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. It does not have a separate legal entity. A Company is association of persons who have come together for a specific purpose. The company has a separate legal entity as soon as it is incorporated under law.

2. Liability of the partners is unlimited. However, the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder.

3. Property of the firm belongs to the partners and they are collectively entitled to it. In case of a company, the property belongs to the company and not to its members.

4. A partner cannot transfer his shares in the partnership firm without the consent of all other partners. In case of a company, shares may be transferred without the permission of the other members, in absence of provision to contrary in articles of association of the company.

5. In case of partnership, the number of members must not exceed 20 in case of banking business and 10 in other businesses. A Public company may have as many members as it desires subject to a minimum of 7 members. A Private company cannot have more than 50 members.

6. There must be at least 2 members in order to form a partnership firm. The minimum number of members necessary for a public limited company is seven and two for a private limited company.

7. In case of a partnership, 100 % consensus is required for any decision. In case of a company, decision of the majority prevails.

8. On the death of any partner, the partnership is dissolved unless there is provision to the contrary. On the death of the shareholder the company' existence does not get terminated.

Ilegal Association:
 

Under the Companies Act, 1956, not more than 10 persons can come together for carrying on any banking business and not more than 20 persons can come together for carrying on any other of business, unless the association is registered under the Companies Act or any other Indian law. Any association which does not comply with the above norms is an illegal association. Therefore, a partnership of more 10 or 20 members, as the case may be, is an illegal association unless the registered under the Companies Act or any other Indian law.

However, this provision does not apply in the following cases :-

1. A Joint Hindu Family business comprising of family members only. But where two or more Joint Hindu families come together for business through partnership, the total number of members cannot exceed 10 or 20 as the case may be, but in computing the number of persons, minor members of such family will be excluded.

2. Any association of charitable, religious, scientific trust or organisation which is not formed with a profit motive

3. Foreign companies.

When the number of members exceed the prescribed maximum, members must register it under Companies Act or any other Indian law.

Consequences of non-registration:
An illegal association is not recognised by law. An illegal association cannot enter into any contract, cannot sue any members or any outsider, cannot be sued by any members or outsiders for any of its debts. The members of the illegal association are personally for the obligations of the illegal association. A member may be liable to a fine of Rs. 1000. Any member of an illegal association cannot sue another member in respect of any matter connected with the association.

Minimum number of members
A public company must have at least 7 members whereas a private company may have only 2 members. If the number of members fall below the statutory minimum and the company carries on its business beyond a period of six months after the number has so fallen, the reduction of number of members below the legal minimum is a ground for the winding up of the company.

Types of Companies

1.   Public Company means a company which not a private company.

2.  Private Company means a company which by its articles of association :-

• A.  Restricts the right of members to transfer its shares

• B.  Limits the number of its members to fifty. In determining this number of 50, employee-members and     ex-employee members are not to be considered.

• C.  Prohibits an invitation to the public to subscribe to any shares in or the   debentures of the company.If a private company contravenes any of the aforesaid three provisions, it ceases to be private company and loses all the exemptions and privileges which a private company is entitled.
   

1. Mimimum number is members is 2 (7 in case of public companies)

2. Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply.

3. Restriction contained in Section 81 related to the rights issues of share capital does not apply. A special resolution to issue shares to non-members is not required in case of a private company.

4. Restriction contained in Section 149 on commencement of business by a company does not apply. A private company does not need a separate certificate of commencement of business.

5. Provisions of Section 165 relating to statutory meeting and submission of statutory report does not apply.

6. One (if 7 or less members are present) or two members (if more than 7 members are present ) present in person at a meeting of the company can demand a poll.

7. In case of a private company which not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporates incorporated outside India, no person other than the member of the company concerned shall be entiled to inspect or obtain the copies of profit and loss account of that company.

8. Minimum number of directors is only two. (3 in case of a public company)

The Company Law Board on being satisfied that the infringement of the aforesaid 3 conditions was accidental or due to inadvertence or that on other grounds, it just an equitable to grant relief, may grant relief to the company from the consequences of such infringement. The infringement of the aforesaid 3 conditions does not automatically convert a private company into a public company. It continues to remain a private company; it merely ceases to be entitled to the privileges and exemptions available to a private company.

3.Companies deemed to be public limited company:

A private company will be treated as a deemed public limited company in any of the following circumstances :-

1. Company limited by shares In this case, the liability of members is limited to the amount of uncalled share capital. No member of company limited by the shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. Members have no liability in case of fully paid up shares.

2. Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. A guarantee company may be a company with share capital or without share capital.

 Unlimited Company: The liability of members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners of a partnership firm.

5.Section 25 Companies: Under the Companies Act, 1956, the name of a public limited company must end with the word 'Limited' and the name of a private limited company must end with the word 'Private Limited'. However, under Section 25, the Central Government may allow comapnies to remove the word "Limited / Private Limited" from the name if the following conditions are satisfied :-

1. The company is formed for promoting commerce, science, art, religion, charity or other socially useful objects

2. The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects.

6. Holding and Subsidiary companies

 

A company shall be deemed to be subsidiary of another company if :-

1. That other company controls the composition of its board of directors ; or

2. That other company holds more than half in face value of its equity share capital

3. Where the first mentioned company is subsidiary company of any company which that other's subsidiary. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A.

The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person.

7.Government  Companies

Means any company in which not less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company. Government Companies are also governed by the provisions of the Companies Act. However, the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptions as may be specified to such government companies.

8. Foreign Companies
Means a company incorporated in a country outside India under the law of that other country and has established the place of business in India.

Foreign Investment in India:

In terms of Section 6(3(b) of Foreign Exchange Management Act 1999 Reserve Bank of India regulates transfer or issue of any security by a person living outside India in consonance with Notification No. Foreign Exchange Management Act 20/2000-RB dated May 3, 2000, which is amended from time to time vide various amendments. As per the “Act”, an Indian entity cannot issue any security except as provided in the Act or Rules or Regulations or with the specific permission of the Reserve Bank to a person living outside India or record in its books any transfer of security from or to such person.

2. Prohibition on investment into India:
No person resident outside India can make investment in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not which is engaged or proposes to engage in the following activities
(i) Business of chit fund, or
(ii) Nidhi Company, or
(iii) Agricultural or plantation activities or
(iv) Real estate business, or construction of farm
Houses
(v) Trading in Transferable Development Rights (TDRs).
It is clarified that Real Estate Business does not include development in townships, construction of residential/commercial premises, roads or bridges.
In addition to the above activities, the FDI is also prohibited in certain activities, a list of which is given in Annex-1 (Item B).

3. Permitted Investments in India:
In other cases investments can be made either with the specific prior approval of the Government of India, the Secretariat for Industrial Assistance/Foreign Investment Promotion Board (SIA/FIPB) or under the Automatic route (Annex-1). The list of the activities requiring the approval of the Government is given in Annexure-A (A) to Schedule 1 to FEMA Notification No 94 and details of the activities/sectors which are covered under the automatic route is given as Annexure-B to the said Schedule. The Automatic Route is not open in the following cases and as such require specific approval of FIPB i.e. (i) where the non-resident investors who have/had a previous financial/technical/ trademark collaboration in an existing domestic company engaged in the same or allied activity, (ii) if the activity or manufacturing item of the issuer company requires an Industrial License under the provisions of the Industries (Development and Regulation) Act, 1951 or under the locational policy notified by Government of India under the Industrial Policy Resolution, 1991 and (iii) the investment is sought in excess of the prescribed sectoral limits Automatic Route.

While the nature of investment activities have been prescribed in the FEMA Regulations, the scope of these activities especially regarding the investments by nonresidents under the Government approval route have been detailed in the Government Manual on Investing in India, Foreign Direct Investment, Policy & Procedures. This is a document which is available in the public domain and can be downloaded from the website of DIPP, Ministry of Commerce and Industry.

4. Eligibility for Investing in India:
A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an incorporated entity outside India, (other than an entity incorporated in Bangladesh or Pakistan) has the general permission to purchase shares or convertible debentures or preference shares of an Indian company subject to certain terms and conditions

5. Nature of Investments:
5.1 The Indian companies have general permission to issue equity / preference /convertible preference shares and convertible debentures subject to certain conditions.

5.2 Investment in a trading company incorporated in India is permitted under automatic route with FDI up to 51 % provided the Indian company is primarily engaged in export activities, and the undertaking is an export house/trading house/super trading house/star trading house. Government also permits certain trading activities under FIPB route, as mentioned in Annexure `B' to Notification No. FEMA 94/2003-RB dated 18th June 2003. (Annex-2 Item No.9)

5.3 A company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annexure A (A) to Notification No.94, may issue shares or convertible debentures to a non-resident, to the extent of 24% of its paid-up capital. Such a company may issue shares in excess of 24% of its paid-up capital if

a) It has given up its small scale status,

b) It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector, and

c) It complies with the ceilings specified in Annexure B to Notification No.94.

5.4 An Export Oriented Unit or a unit in Free Trade Zone or in Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park may issue shares or convertible debentures to a person resident outside India in excess of 24 % provided it conforms to the ceilings specified in Annexure B to Notification No. 94 as annexed at Annex-2.

6. General Permissions granted under the Regulations:

6.1 Issue of Rights/Bonus shares

General permission is also available to Indian companies to issue Right/Bonus shares to existing non-resident share-holders, subject to adherence to sectoral cap and consequential offer on right basis is made at a price not lower than that at which offer is made to resident shareholder. As clarified in terms of AP (DIR Series) Circular No 14 dated 16th September 2003, entitlement of rights shares is not automatically available to investors who have been allotted such shares as OCBs. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However, bonus shares can be issued to OCBs.

6.2 Acquisition of shares under Scheme of Amalgamation/merger Where a Scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company may issue shares to the shareholders of the transferor company, resident outside India subject to ensuring that the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank. The transferor company or the transferee or new company should not be engaged in activities prohibited in terms of FDI policy viz agriculture, plantation or real estate business or trading in TDRs, etc.

6.3 Issue of shares under Employees Stock Option Scheme A company may issue shares under the Employees Stock Option Scheme, to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, other than citizens of Pakistan, directly or through a Trust subject to the condition that the scheme has been drawn in terms of relevant regulations issued by the Securities Exchange Board of India; and face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid-up capital of the issuing company. The issuing company is required to report the details and submit certificate stipulated to Reserve Bank, within 30 days from the date of issue of shares.

7. Reporting:

7.1 Advance Reporting

An Indian company issuing shares or convertible debentures under bonus, rights, amalgamation and stock option in accordance with these Regulations should submit to Reserve Bank the details of advance remittance, not later than 30 days from the date of receipt of the amount of consideration, giving details regarding:
Name and address of the foreign investors

Date of receipt of funds and their rupee equivalent

Name and address of the authorised dealer through whom the funds have been received, and

Details of the Government approval, if any
7.2 Reporting Issue of Shares
After the issue of shares the company should file a report in Form FC-GPR not later than 30 days from the date of issue of shares with the Regional Office of RBI where the registered office of the company is situated.

8. Issue of shares by Indian companies under ADR/GDR

8.1 An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). Regulation 4 of Schedule I of FEMA Notification no. 20 allows an Indian company to issue its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that:

The ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under from time to time
The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and

Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations. These instruments are issued by a Depository abroad and listed in the overseas stock exchanges like NASDAQ. The proceeds so raised have to be kept abroad till actually required in India. There are no end use restrictions except for a ban on deployment/ Investment of these funds in Real Estate and the Stock Market. There is no monetary limit up to which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy and the foreign shareholding after issue should be in compliance with the FDI policy.

8.2 The ADR/GDR can be issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager of the issue. The Indian company will issue its rupee denominated shares in the name of the Overseas Depository and will keep in the custody of the domestic Custodian in India. On the basis of the ratio worked out and the rupee shares kept with the domestic Custodian, the Depository will issue ADRs/GDRs abroad.

8.3 A limited Two-way Fungibility scheme has been put in place by the Government of India for ADRs/GDRs. Under this scheme, a stock broker in India, registered with SEBI, can purchase the shares from the market for conversion into ADRs/GDR. Re-issuance of ADRs/GDR would be permitted to the extent of ADsRs/GDRs which have been redeemed into underlying shares and sold in the domestic market.

8.4 An Indian company can also sponsor an issue of ADR/GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs/GDRs can be issued abroad. The proceeds of the ADR/GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the shareholders who have tendered such shares for conversion into ADR/GDR.

8.5 The ADR/GDR/FCCB proceeds may be utilized in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public in view of their strategic importance. Ads have been permitted to allow Indian companies to prepary the existing FCCB subject to certain conditions

8.6 Reporting of such Issues

The Indian company issuing shares shall furnish to the Reserve Bank, full details of such issue in the form specified in Annexure C to Notification No.FEMA 20/2000-RB dated May 3, 2000 within 30 days from the date of closing of the issue. The company should also furnish a quarterly return in the form specified in Annexure D to Reserve Bank within 15 days of the close of the calendar quarter.

9. Issue Price

Price of shares issued to persons resident outside India under Schedule-I (i.e. under the FDI Scheme), would be worked out on the basis of SEBI guidelines in case of listed shares. In other cases valuation of shares would be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.

10. Permission for retaining share subscription money received from persons resident outside India in a foreign currency account

Reserve Bank may, permit an Indian company issuing shares to persons resident outside India under Schedule I to FEMA Notification No. 20 (i.e. under the FDI scheme), to retain the subscription amount in a foreign currency account, subject to such terms and conditions as it may stipulate.

11. Portfolio Investment Scheme

11.1 Foreign Institutional Investors registered with SEBI and Non-resident Indians are eligible to purchase the shares and convertible debentures under the Portfolio Investment Scheme. The FII should apply to the designated AD, who may then grant permission to FII for opening a foreign currency account and/or a Non Resident Rupee Account.

NRIs should apply to the concerned designated branch of the AD authorised by RBI to administer the Portfolio Investment Scheme (PIS) for permission to open a NRE/NRO account under the Scheme.

11.2 Investment by foreign Institutional Investor
11.2.1 In the case of FIIs, the total holding of each FII/SEBI approved sub account shall not exceed 10% of the total paid up capital or 10% of the paid up value of each series of convertible debentures issued by an Indian company and the total holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of the paid up capital or paid-up value of each series of convertible debentures. This limit of 24% can be increased to the sectoral cap/statutory limit as applicable to the Indian company concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body. FIIs are not permitted to invest in Print Media Sector through FDI or PIS routes. Such investment by FII requires prior approval of Government of India, Foreign Investment Promotion Board and Ministry of Information & Broadcasting. FIIs should also take delivery of the shares purchased and give delivery of shares sold.

11.2.2 The FIIs are also permitted to trade in all exchange traded derivative contracts subject to position limits as prescribed by SEBI and advised by RBI to the custodian banks. ADs can also offer forward cover to FIIs to the extent of total inward remittance net of liquidated investments.

11.2.3 Registered FIIs have been permitted to purchase shares/convertible debentures of an Indian company through offer / private placement. This is subject to applicable ceiling as indicated in Schedule 2 to Notification No. FEMA 20/2000-RB dated May 3, 2000. It is clarified that a FII may invest in a particular issue of an Indian company either under Schedule 1 (i.e. FDI Scheme) or Schedule 2 (i.e. Portfolio Investment Scheme). The ADs may ensure that the FIIs who are purchasing the shares by debit to the special rupee accounts report these details separately in the LEC (FII) returns. The company who has issued the shares to the FIIs under Schedule 1 (FDI) (for which the payment has been received directly into company’s account) and under Schedule 2 (for which the payment has been received from FIIs account maintained with Authorized Dealer in India) should report these figures separately under item 4(b) of the FC-GPR return so that the details could be suitably reconciled for statistical / monitoring purposes.

11.3 The FII shall restrict allocation of its total investment between equities and debt including dated Government Securities and Treasury Bills in the Indian Capital Market in the ratio of 70:30. The FII can also form a 100% Debt Fund and get registered with SEBI for investment in debt investments. Investment in debt securities by FIIs are subject to limits, if any, stipulated by SEBI in this regard.

11.4. Investments by NRIs

11.4.1 In the case of NRIs under PIS it is to be ensured that the paid-up value of shares/ convertible debentures purchased by an NRI on repatriation and non-repatriation basis under PIS route should not exceed 5% of the paid up capital/ paid up value of each series of debentures. The aggregate paid-up value of shares/ convertible debentures purchased by all NRIs should not exceed 10% of the paid-up capital of the company/paid-up value of series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company concerned passes a special resolution to that effect. The NRI investor should take delivery of the shares purchased and give delivery of shares sold. Payment for purchase of shares and/or debentures is made by inward remittance in foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India if the shares are purchased on repatriation basis and by inward remittance or out of funds held in NRE/FCNR/NRO account of the NRI concerned, maintained in India where shares/debentures are purchased on non-repatriation basis. Under PIS, NRIs are not permitted to invest in Print Media Sector.

11.4.2 The link office of the designated branch of an AD shall furnish to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai a report on a daily basis on PIS transactions undertaken by it, such report should be furnished on-line or on a floppy in a format supplied by RBI.

11.4.3 Shares purchased by NRI’s on the stock exchange under PIS cannot be transferred by way of sale under private arrangement of gift to a person resident India or outside India without prior approval of RBI.

11.4.4 NRI may invest in Exchange Trade Derivative Contracts approved by SEBI from time to time out of INR funds held in India on non-repatriation basis subject to the limits prescribed by SEBI.

12. Investments by Overseas Corporate Bodies (OCBs)

12.1 With effect from November 29, 2001, OCBs are not permitted to invest under the PIS in India. Further, the OCBs that have already made investments under the Portfolio Investment Scheme may continue to hold such shares/convertible debentures till such time these are sold on the stock exchange.

12.2 OCBs have been derecognised as a class of investor entity in India with effect from September 16, 2003. However, requests from such entities which are incorporated and not under the adverse notice of RBI/SEBI will be considered for undertaking fresh investments under FDI scheme with prior approval of Government if the investment is under Government route and with the prior approval of RBI if the investment is under automatic route.

13. Transfer of Shares and convertible debentures -Non-resident to Resident/Resident to Non-Resident- General Permission

13.1 General permission has been granted to non-residents/NRIs for transfer of shares and convertible debentures of an Indian company as under: -

A person resident outside India (Other than NRI and OCB) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India (including NRIs); provided transferee has obtained prior permission of SIA/FIPB to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged. The restriction is not applicable to the transfer of shares to International Financial Institutions (i.e. ADB, IFC, CDC, DEG) and transfer of shares to Indian company engaged in Information Technology Sector.

NRIs and erstwhile OCBs may transfer by way of sale or gift the shares or convertible debentures held by him or it to another Non-resident Indian; provided transferee has obtained prior permission of Central Government to acquire the shares if he has previous venture or tie-up in India through investment in shares or convertible debentures or a technical collaboration or a trade mark agreement or investment in the same field or allied field in which the Indian company whose shares are being transferred, is engaged. The restriction is not applicable to the transfer of shares to International Financial Institutions (i.e. ADB, IFC, CDC, DEG) and transfer of shares to Indian company engaged in Information Technology Sector.

The person resident outside India may transfer any security to a person resident in India by way of gift.

A person resident outside India may sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a registered broker.

A person resident in India may transfer shares / convertible debentures (including transfer of subscriber's shares), by way of sale, of an Indian company in sectors other than financial service sector (i.e. Banks, NBFC and Insurance) to a person resident outside India, subject to the compliance with the guidelines indicated in Annex to A.P. (Dir Series) Circular No.16 dated October 4, 2004 (Annex-3).

General permission is also available for transfer of shares / convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to certain conditions, subject to the guidelines indicated in the Annex to A.P. (Dir Series) Circular No.16 dated October 4, 2004 (Annex-3). 13.2 Prior permission of RBI in certain cases for transfer of shares/convertible debentures

A person resident in India, who proposes to transfer to a person resident outside India any security, by way of gift, is required to obtain prior approval from Reserve Bank.

A person resident in India who proposes to transfer any share or convertible debenture of an Indian company engaged in financial sector (i.e. Banks, NBFCs and Insurance), and which attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, etc., by way of sale to a person resident outside India will have to obtain prior approval of FIPB, Ministry of Finance & Company Affairs, Government of India followed by permission from RBI. The above two stage approval are applicable even when the transfer is made on no repatriation basis.

14. Purchase of other securities (Schedules 4 and 5)

14.1 There is no limit on NRI purchasing shares/ convertible debentures issued by an Indian company on non-repatriation basis whether by public issue or private placement. Amount of consideration for such purchase shall be paid by inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR/NRO account maintained with the AD.

NRI can also, without any limit, purchase on non-repatriation basis dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds.
As notified by Government NRIs are not permitted to make Investments in Small Savings Schemes including PPF.

14.2 Foreign Institutional Investors can buy dated Government securities/ treasury bills, non-convertible debentures /bonds issued by Indian companies and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognized stock exchange in India.

14.3 A Multilateral Development Bank which is specifically permitted by Government of India to float rupee bonds in India may purchase Government dated securities.

14.4 NRIs resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis subject to the condition that the amount of consideration for such purchase on repatriation basis shall be paid only by way of inward remittance in free foreign exchange through normal banking channels or by debit to their NRE/ FCNR(B) accounts of NRIs.

In case of investment on non-repatriation basis, the sale proceeds shall be credited to NRO account. The amount invested under the scheme and the capital appreciation thereon shall not be allowed to be repatriated abroad.

15. Investments by Venture Capital Funds

A SEBI registered Foreign Venture Capital Investor (FVCI) with general permission from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or in a Venture Capital Fund( VCF) or in a Scheme floated by such VCFs subject to the condition that the VCF should also be registered with SEBI. They can purchase equity/equity linked instruments/ debt/debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement or in units of schemes/ funds set up by a VCF. RBI, on application, may permit a FVCI to open a foreign currency account or rupee account with a designated branch of an authorised dealer.

The purchase/ sale of shares, debentures, units can be at a price that is mutually acceptable to the buyer and the seller /issuer. ADs are also authorised to offer forward cover to FVCIs to the extent of total inward remittance net of investments liquidated.

16. Conversion of ECB / Lump sum Fee/Royalty into Equity

16.1 General permission has been granted for conversion of ECB into equity, subject to certain conditions and reporting requirements. It is also clarified that the conversion facility is available for ECBs availed either with general permission or specific permission of Reserve Bank. This would also be applicable to ECBs irrespective of whether due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators. However, import payables, deemed, as ECBs would not be eligible for conversion.
16.2 General permission is also available for issue of shares against lump-sum technical know-how fee, royalty, under automatic route or SIA/FIPB route, subject to pricing guidelines of Reserve Bank / SEBI and compliance with applicable tax laws.

17. Remittance of sale proceeds

Remittance of sale proceeds of an Indian Security held by a person resident outside India is permissible subject to conditions stipulated in relevant Schedules to the Notification No.FEMA.20/2000-RB dated May 3, 2000, as amended from time to time. An authorised dealer can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate has been produced.

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