Under the current FDI regime, investment by NRIs is not subject to any sectoral restriction if it is not to be repatriated back. The Reserve Bank fears this provision can be used to bring foreign investment into restricted sectors or above the limits prescribed, a concern endorsed by the North Block.
They have proposed that NRIs should be allowed to invest only under the repatriable route, same as other foreign investors, and are made to comply with various restrictions.
"The provision has lost its relevance as non-resident Indians can invest on repatriable basis and there is no need for keeping such a category for investment," a government official told ET. Inter-ministerial consultations are underway. The finance ministry has sent the proposal to the ministry for overseas Indian affairs which manages NRI affairs. The Department of Industrial policy and Promotion, the nodal body for foreign direct investment, is also not opposed to change. The rule change could hit NRI investments in India, which contributed $4.7 billion between April 2000 and October 2011.
Schedule four of the Foreign Exchange Management Act allows NRIs to invest on a non-repatriable basis on same terms as any other domestic investors. This means that such investment by NRIs is not subject to any specific restriction prescribed for a sector under the FDI policy.
Experts say the RBI's concerns of regulatory arbitrage were valid. Non-residents can, for instance, invest in multi-brand retail, hold more than 74% stakes in telecom or invest freely in construction through the non-repatriable route.
Since the government does not look into the source of funds, NRIs can be used as a front to invest unhindered into any sector. Alternatively, the same NRI investor can invest up to the sectoral limit through the repatriable and beyond that through non-repatriable route, thereby escaping the restriction.
NRI investments made under non-repatriable route are not reported to the RBI and escape regulatory radar.
Akash Gupt, an executive director in consultancy firm PwC, feels stopping the non-repatriable route will create problems with respect to use of local funds by NRIs. "If the window (non-repatriable) is shut down, it would mean that NRIs cannot use their local funds to invest unless they are specifically allowed to repatriate such original capital."
Instead, he proposes a simpler fix that the government could clearly say that NRI investments would have to comply with restrictions on FDI no matter which window is used.