Rules Eased for Foreign Parents to Raise Stake in Listed Firms

New norm to apply to all non-resident entities In a move to quicken dollar inflows, the Reserve Bank of India (RBI) has changed the rules to make it easier for foreign and NRI promoters to raise stake in listed Indian companies.  Offshore parents of such local companies can now freely purchase shares by using the services of registered Indian brokers. Such acquisition of shares can also be funded with dividend amounts paid by Indian companies to these non-resident promoters.  The new rule will apply to all non-resident entities, including non-resident Indians (NRIs).  At present, foreign institutional investors (FIIs), qualified foreign investors (QFIs) and NRIs are eligible to buy shares on Indian stock exchanges in compliance with foreign exchange regulations.  On Friday evening, the central bank opened another door to encourage inflows by adding all nonresident promoters to the list.  "The move is keeping in mind the necessity to bring in more dollars as well as to address issues that have been raised by foreign promoters. Open offers and delisting were failing due to tax disincentives…This will also discourage dollar outflow as dividend received can be used to buy shares," said H Jayesh, founder partner at law firm Juris Corp. There is no long-term capital gains tax on shares sold on the exchange. Payment Via Inward Remittance  According to the RBI circular, a foreign promoter using dividend to increase its shareholding will have to park the money in a "specially designated non-interest bearing rupee account for acquisition of shares on the floor of stock exchange".  The consideration for purchase of shares can also be paid by way of inward remittance through normal banking channels and debiting NRE/ FCNR bank accounts of NRIs. However, if a non-resident sells the shares in a subsequent off-market transaction to another non-resident, the pricing cannot be below the floor set by the foreign exchange regulations.  RBI has told all banks to bring the contents of the notification to the "notice of their customers/constituents concerned". Earlier this year, the government had come out with new rules to attract foreign residents to invest directly in the Indian stock market.  In this route, custodians, typically MNC banks that hold the shares on behalf of these offshore investors, are responsible for collecting the tax on capital gains and meeting anti-money laundering rules. "This, besides a sluggish market, was one of the reasons why not much has come in through the QFI route," said a banker.