This article is written especially for startups, wherein they seek investments in their company ( Private Limited). Since, investments in early stage startups is based on the idea and not on real valuation, it is obvious the investment value per share would be more than the face value of the shares.Â The income tax provisions in India casts restriction on investing in a private limited company, exceeding the fair market value of the shares. We have written this article to address the issue,Â Tax and Legal provisions for investments by a Non Resident Indian in an Indian Private Limited Company, from RBI and Income tax provisions standpoint.
General provisions with regard to issuance of shares at premium
As per Section 56(2) (viib), where a company, which is a closely held company in which the public is not substantially interested, that is a private limited company , receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be taxable in the hands of such company. If observed closely, the provision pertains to taxability of residents specifically which implies that such similar investment if made by a non -resident shall not be taxable in the hands of the company. As per the provision, this section implicitly does not apply to the non â€“ residents and hence the NRIs can freely purchase the shares of a closely held company at a price higher than the fair market value i.e., at a premium and the amount in excess of the fair market value of the shares will be exempt in the companyâ€™s hands. It is pertinent to note that NRIs/OCBs being an Indian citizen as also a foreign citizen of Indian origin have been granted general permission to freely invest in the shares/convertible debentures of an Indian company carrying on almost every kind of business in India barring a few cases wherein prior approval of the Reserve Bank of India is necessary. This investment may be made on repatriation basis or non-repatriation basis. Repatriation is governed by various Investment caps / ceilings. A general permission is also available to an Indian company to issue shares or convertible debentures by way of new/rights/bonus issue to NRIs/OCBs on non-repatriation basis. However, there is a lack of clarity within the provision as to whether the non-resident should invest through an NRO/NRE/FCNR Account for it to be tax- free.Â As per the RBI Guidelines, a non-resident can freely invest in the shares of an Indian company upto USD 1 million per calendar year through an NRO account on a repatriable basis. Hence, one can repatriate (that is transfer to a bank account in India) the amount of investment to be made in the shares of a company up to the maximum ceiling limit of USD 1 million. However, one would need to produce a certificate from his chartered accountant known as the â€œValuation Certificateâ€. On the other hand, an NRO account is freely repatriable without any ceiling limit; it is tax free in India. Hence, as regards investment in the shares of an Indian company by an NRI, there it can be made through any account, whether NRE or NRO keeping in mind the ceiling limit of USD 1 million when remittance is done throughÂ NRO account. There lies no special provision for the same, however, if remittance is made through NRE, one need to comply with the relevant provisions of FEMA Rules.Â It may be noted that investment made by way of foreign exchange remittance from abroad will require Know Your Customer (KYC) Certificate of Indian bank who will require such KYC from foreign bank remitting the funds.
Compliance by Indian companies
The Indian company issuing the securities on repatriation basis should within 30 days of receipt of application money and also within 30 days of issue of shares / debentures submit various details to the Reserve Bank of India briefly stated herein:
- Name and address of the NRI investor; amount of investment; share of NRI participation; name and address of bank through which the funds have been received and other relevant facts about the investor.
- Name and address of the Company ; its business ; authorised capital ; paid-up capital ; share of NRI participation ;present value of shares as per specified guide linesÂ and other relevant facts about the company together with professional chartered accountant / company secretary’s certificates etc.
- Said information and submission is not required to be submitted if the shares / debentures are issued on non-repatriation basis.
If shares are not issued within 180 days of receipt of application money, such application money is to be refunded to the investor failing which needs to go for compounding before RBI explaining the reasons behind the non issue of shares or non refund of money.
An Indian private limited can seek investment from a non-resident at a value higher than the fair market price of the shares without attracting the implications or provisions of Section 56 (2) (viib) and the share premium would be a non- taxable income for the company. The provisions are not very clear as to whether the investment by the non-resident should be in Indian rupee or foreign currency for providing exemption to the company, however in view of objective of the legislation, it may be assumed that the NRI can still investment from their NRO account and the exemption under the Income Tax Provision would still prevail. You can also look to read this – We have written on YourStory.com Platform. Thanks for reading for this article. Please feel free to write to us,Â We want to hear it all!Suggestions? Complaints? Feedback? Requests?Â at [email@example.com] or call us at +91 88208208 11. We would be more than happy to assist you.