The non-resident Indian on a non-repatriation basis is a different legal position.

India's exchange-control rules give a non-resident Indian and an overseas citizen of India a choice the rules give nobody else: to invest in India on a repatriation basis, as foreign capital with the sectoral conditions, the lock-in, the pricing rules and the right to take the proceeds out; or on a non-repatriation basis, as capital the rules treat as domestic, outside the sectoral conditions and the lock-in, with the proceeds staying in India. The second is a different legal position, written into the rules rather than conceded to the diaspora, and it reaches every structure built above such a holder. A Gulf-resident family of Indian origin investing on a non-repatriation basis into an Indian development company holds domestic capital, and the company's foreign-capital rules do not bind that capital. A fund whose holders are such families, structured to hold through a vehicle that preserves the non-repatriation character, holds Indian exposure on terms a foreign fund cannot. The position's price is that the proceeds stay: a holder that invested without a right to repatriate may use, reinvest or hold the money in India, and may move it out only within the general limits the rules give a non-resident for remitting Indian balances, which are limits and not rights.

This note sets out who the holder is and the choice the rules give, what the non-repatriation basis does and does not do, the evidence of the basis at entry, the vehicle that preserves the character, the two kinds of capital in one structure, the proceeds and the general limits, the direct ownership of property and its exceptions, the tax position beside the exchange-control one, the Gulf family's own jurisdiction and its rules, the lender's reading, the fund's other holders and the position's disclosure, a comparison, a worked structure as a type, cases, what each party holds, the sequence, questions, terms and what to read.

Who the holder is

A non-resident Indian is an Indian citizen resident outside India under the rules' definition; an overseas citizen of India is a person of Indian origin registered as such, with rights the citizenship law fixes. Both are persons resident outside India for exchange-control purposes, and the rules give them investment routes of their own beside the routes for foreign investors generally. A Gulf-resident family of Indian origin, whose members hold one status or the other, is the holder this note describes, and its members' statuses are checked individually, because the position is personal and a family company the family owns is a different person whose status the rules read by its own tests.

The choice the rules give

On a repatriation basis the holder invests as a foreign investor: the sectoral conditions apply, the lock-in runs, the pricing rules apply to transfers with residents, the reporting is made, and the proceeds may leave India through the bank. On a non-repatriation basis the holder invests as domestic capital: the sectoral conditions and the lock-in do not apply, the pricing rules do not apply to transfers with residents, the reporting is lighter, and the proceeds stay in India subject to the general limits on remitting Indian balances. The choice is made at the investment, through the payment channel the rules prescribe, and it is the investment's character for its life.

What the basis does and does not do

It does: remove the construction-development sector's conditions on the capital, including the lock-in per tranche and the prohibition on dealing that applies to foreign capital; remove the pricing rules on transfers between the holder and residents; and put the capital in the regime's domestic category for the company's own compliance. It does not: change the company's Indian tax, which applies as it applies to any Indian company; change the holder's own tax position in India on the investment's income and gains, which the tax law fixes by the holder's residence and the income's source; or give the proceeds a right to leave. The basis is an exchange-control character and not a tax one, and the two are read separately.

Why the position is written into the rules

The rules recognise that persons of Indian origin living abroad hold a relationship with India that foreign investors do not, and they give such persons a route to invest in India as if resident, on the condition that the money stays. The condition is the position's logic: domestic treatment for money that behaves domestically. The diaspora's investment through the route is large, and the route's terms are stable because they serve the regime's purpose as well as the holder's. A Gulf manager that reads the route as a concession to be argued reads it wrongly; it is a category with its own rules, and the structure that uses it uses the rules as written.

The family's decision

The family decides the basis on one question: where will the money be used. A family with Indian interests, property, relations, a business, a plan to return, uses the money in India and chooses the non-repatriation basis for its freedom from the conditions; a family whose life and capital are in the Gulf and elsewhere chooses the repatriation basis for the proceeds' mobility and accepts the conditions. Many families split, investing part on each basis, with each part evidenced by its own channel and recorded. The structure offers the choice per family and per investment, and the manager does not make it for them.

The recognised vehicle's form

The rules recognise entities owned and controlled by such holders as investing on the non-repatriation basis, in forms the rules name, and the recognition has conditions on the entity's ownership and on the basis of its own funding. A vehicle formed by several families in India, funded from their non-resident ordinary accounts, is the usual form, and its own investment in the development company is on the basis. The vehicle's governance is the families', with the manager as adviser or manager under an arrangement India's rules on such services permit, and the vehicle's relationship with the manager's fund abroad is the co-ordination agreement. The form is read with counsel at design because the recognition's conditions are specific and a vehicle outside them is a foreign investor.

The evidence of the basis at entry

The basis is evidenced by the payment channel: the investment is made from the holder's non-resident ordinary account in India, the account the rules designate for non-repatriable funds, or by inward remittance credited as non-repatriable, and the company's reporting records the basis. The bank tests the repatriation right years later by examining how the acquisition was funded, and an investment whose funding channel does not evidence the basis is an investment whose character the bank assigns on the evidence it has. The structure routes every investment on the basis through the channel the rules prescribe and records it at the company, because the character is proved by the payment and not by the intention.

The vehicle that preserves the character

A fund whose holders are such families, formed abroad, is a foreign investor when it invests in India, and its capital is foreign whatever its holders' status, because the fund is the investor and not the families. To preserve the non-repatriation character the families invest through a vehicle the rules recognise for the purpose: an Indian vehicle owned by them on the basis, or a structure in which each family's investment is made in its own name on the basis with the fund's role as manager and co-ordinator rather than as investor. The rules' recognition of vehicles owned by such holders on the non-repatriation basis is specific and read by Indian counsel, and a fund that pools the families' capital abroad and invests as one has converted domestic capital into foreign by the pooling.

Two kinds of capital in one structure

A structure with both kinds of holder, families on the non-repatriation basis and institutions as foreign investors, has two regimes in one company if both hold the same shares, and the bank asks at every exit which capital is leaving. The structure separates the two: in classes of shares with the basis recorded per class, or in separate companies, or in a parallel vehicle for the families beside the fund for the institutions, co-ordinated under an agreement. Each kind of capital carries its own regime, the register shows which is which, and the exits run separately: the families' proceeds stay in India within the limits, and the institutions' proceeds leave through the bank against the foreign capital's tests.

The pricing rules and the families' transfers

Transfers between the families' vehicle and residents are outside the pricing guidelines, because the vehicle's capital is domestic, and a promote to a resident developer settled by a transfer from the families' class is priced by the parties; a transfer between the institutions' class and the same developer is priced by the certificate. A structure with both classes has two pricing regimes on transfers with the same resident, and the joint venture's economics are drafted per class. The families' freedom from the pricing rules is one of the position's advantages, and it is one the institutions' class does not share, which the co-ordination agreement's fairness provisions address.

The proceeds and the general limits

A non-resident holding Indian balances from non-repatriable investments may remit abroad within an annual limit the rules fix for such remittances, on the bank's satisfaction as to tax and source, and the limit is a general allowance and not a right attached to the investment. A family whose Indian proceeds exceed the limit holds the excess in India, reinvests it in India, or spends it there, and a family planning its Gulf affairs on the proceeds' arrival abroad has planned on a limit. The structure's memorandum for such holders says so in terms, because the position's price is the proceeds' location, and a holder that did not understand it at entry disputes it at exit.

The direct ownership of property

Such a holder may own immovable property in India directly, other than agricultural land, a farmhouse or plantation property, and may acquire it by purchase, gift or inheritance under the rules' provisions for such holders. A family that owns Indian land directly and proposes to put it into a fund has changed the land's position: directly held by a person the rules permit, it becomes held by a company whose capital is whatever the family's investment in the company is, on the basis the family chose. A contribution of the family's land to a fund's Indian company, for shares on the non-repatriation basis, keeps the capital domestic; a contribution to a foreign fund's company for the fund's units converts the land's holding into foreign capital with the sectoral conditions. The structure reads the family's existing holdings before it proposes the vehicle.

The tax position beside the exchange-control one

The holder's income and gains from the Indian investment are taxed in India under the tax law by source, with the holder's residence abroad and any treaty between India and the holder's jurisdiction read for relief; and the holder's jurisdiction taxes the holder's worldwide income or does not, as its law provides. A Gulf-resident family in a jurisdiction without personal income tax has an Indian tax and no home tax; the same family resident elsewhere has both and a treaty question. The exchange-control basis does not change the tax, and the tax adviser reads the family's position as a family and the vehicle's as a vehicle.

The anti-money-laundering reading in two places

The families' investment is read by India's rules on the source of funds and by the Gulf state's, and the non-resident ordinary account's funding is itself a record of money that came from abroad or was earned in India, with the bank's checks at each credit. The Gulf state's regime reads the families' outward investment to India as a resident's foreign holding, with its own reporting where the state requires it. The provenance file for such a family is built to both regimes, and the file for a family whose Indian balances were earned in India and whose Gulf balances were earned in the Gulf shows two origins for two kinds of money, which is the usual position and the one the file explains.

The Gulf family's own jurisdiction

The family is resident in a Gulf state, and the state's rules on its residents' foreign investments, its reporting, its anti-money-laundering regime and its own treatment of the family's Indian vehicle apply to the family as the state's resident. A vehicle the family owns in India is a foreign company for the Gulf state's purposes, and the state's rules on residents' foreign holdings are read alongside India's. The family's advisers in both places read the structure, and the structure's India page carries the Gulf column for the family as well as the Indian one.

The lender's reading

A lender to the Indian company reads the capital's character for the company's constraints: domestic capital carries no lock-in and no sectoral conditions, and a company wholly funded on the non-repatriation basis is a company the lender reads as domestically owned for its own covenants. A lender to the fund abroad reads the families' position for the fund's security: the families' proceeds stay in India, and a capital-call facility secured on the families' commitments is secured on commitments whose returns the facility cannot reach abroad. The facility is structured to the position.

The fund's other holders and the disclosure

A fund with both kinds of holder discloses each position to each: the institutions learn that part of the company's capital is domestic and outside the lock-in, which affects the exit's timing for the whole; the families learn that their proceeds stay and the institutions' leave, which affects their reading of fairness. The memorandum carries both positions, the co-ordination agreement carries the exits' separation, and the committee's reading of any exit reads the two kinds of capital as two.

By feature · by basis	Repatriation basis	Non-repatriation basis
Regime's category	Foreign capital	Domestic capital
Sectoral conditions and lock-in	Apply	Do not apply
Pricing rules on transfers with residents	Apply	Do not apply
Reporting	Full	Lighter
Proceeds	May leave through the bank against the tests	Stay in India, within the general limits
Evidence	The inward remittance and the reporting	The non-resident ordinary account or the non-repatriable credit
Tax	India by source; home by residence	The same
Direct property	As the rules permit such holders	As the rules permit such holders

A structure, as a type

A manager proposes an Indian development programme to a group of Gulf-resident families of Indian origin and to two institutions. Indian counsel reads each family member's status and confirms the non-repatriation route and the vehicle the rules recognise for it; the families invest through an Indian vehicle they own on the basis, funded from their non-resident ordinary accounts, with the basis recorded at the company. The institutions invest through the manager's fund abroad as foreign capital, with the sectoral conditions and the lock-in. The two hold separate classes in the development company, recorded, under a co-ordination agreement that allocates pro rata, runs the exits separately and gives the families' vehicle a seat on the fund's committee. The memorandum for the families says the proceeds stay in India within the limits; the memorandum for the institutions says part of the capital is domestic. At exit the development company's project is sold; the families' class receives its proceeds in India and reinvests; the institutions' class is sold to a non-resident buyer after the last clock and the bank remits. Each kind of capital carried its own regime.

The structure paper's page

The structure paper's page for such holders carries: each family's status and its members, the basis chosen per family and per investment, the channel and the evidence, the recognised vehicle's form and its conditions, the classes in the development company, the co-ordination agreement, the memorandum's sentences on the proceeds, the families' existing Indian property, the tax position per family, the Gulf state's rules on the families' foreign holdings, and the exits' two channels. The page is written before the first family is approached, and it is the page each family's advisers in both places read.

The second programme's reading

A manager's second Indian programme for such families is raised on the first's record: whether the position was preserved, whether each family's basis was evidenced, whether the proceeds went where the memorandum said, whether the institutions' exit cleared. A first programme whose families held what the rules gave them is a programme whose families return and bring others, in a community where families talk; one that pooled them into foreign capital is a programme whose families tell the community. The position is the rules', and the manager's record of preserving it is its standing with the holders the Gulf offers India.

Four cases, as types

A manager pools the families' capital in a fund abroad and invests as one foreign investor. The families' capital is foreign capital with the lock-in and the conditions, the non-repatriation position is lost by the pooling, and the families ask why the structure did not preserve what the rules gave them.

A family invests on the non-repatriation basis without understanding that the proceeds stay. At exit the family's Gulf affairs await a remittance the general limit does not permit in one year, and the family's advisers read the memorandum for the sentence that was not there.

A company holds both kinds of capital in one class. At exit the bank asks which capital is leaving, the register does not say, and the institutions' remittance waits while the company's records are reconstructed to show which shares were funded from which channel.

A structure reads each holder's status, routes each investment through the channel that evidences its basis, separates the two kinds of capital in classes under a co-ordination agreement, discloses each position to each holder, and runs the exits separately. The families held Indian exposure on the terms the rules gave them, and the institutions held it on theirs.

What each party holds

The families hold their status, their basis evidenced at entry, their vehicle and the proceeds' location.

The institutions hold their foreign capital with its conditions and its exit through the bank.

The manager holds the structure's separation, the disclosure to each and the co-ordination agreement.

Indian counsel holds the rules on such holders, the recognised vehicles and the evidence of basis.

The bank holds the test at each exit of which capital is leaving.

The tax adviser in each place holds the family's tax beside the exchange-control basis.

Where it surfaces

It surfaces at the families' first conversation, in the question where the money will be used. It surfaces at the payment, in the channel. It surfaces at the company's register, in the class. It surfaces at the institutions' diligence, when they learn part of the capital is domestic. It surfaces at the exit, when the bank asks which capital is leaving. It surfaces at the remittance limit, when a family wants more abroad than the year allows. And it surfaces at a family's contribution of its own land, when the position changes.

The cost of getting it wrong

A pooled structure costs the families the position the rules gave them and the manager the families' trust. A basis not evidenced at entry costs the character the bank assigns. Two kinds of capital in one class cost the institutions' exit a reconstruction. A memorandum silent on the proceeds' location costs a dispute at the exit. The cost of the structure is counsel's reading of each family's status, the channel's discipline at each payment, the classes and the co-ordination agreement, and the sentence in the memorandum.

The committee's reading

The committee reads the register of the development company for the two classes and their bases, the channel evidence for each family's investment, the co-ordination agreement's exit provisions, the remittance position of the families' vehicle annually, and the disclosure to each kind of holder. It reads any proposal that a family contribute its own Indian property for the change of position. And it reads the exit plan for the two channels. A committee that reads the families as foreign holders reads the structure wrongly; one that reads two kinds of capital reads it as the rules do.

A timeline, as a type

At design each family's status is read and the recognised vehicle's form confirmed. In month one the families' vehicle is formed in India and funded from their non-resident ordinary accounts; the manager's fund abroad holds the institutions' capital. In month three both invest in the development company in separate classes, each basis recorded, under the co-ordination agreement. In year two a family contributes its own Indian parcel to the company for shares in the families' class, keeping the domestic character. In year four the project completes. In year five the project is sold; the families' class receives its proceeds in India and the vehicle reinvests under its own governance; the institutions' class is sold to a non-resident buyer after the last clock and the bank remits. In year six a family remits part of its Indian balance abroad within the year's limit, as the memorandum said it could.

The sequence

1. Each family member's status is read, and the non-repatriation route and the recognised vehicle are confirmed with Indian counsel.
2. Each investment on the basis is made through the channel that evidences it and recorded at the company.
3. The two kinds of capital are separated in classes or companies under a co-ordination agreement.
4. The memorandum for the families states that the proceeds stay within the general limits, and the memorandum for the institutions states that part of the capital is domestic.
5. The families' existing Indian property is read before any contribution, so that its position is preserved or changed knowingly.
6. The exits run separately: the families' in India, the institutions' through the bank.

Questions a manager asks

Can the families change their basis later. An investment's basis is set at entry by its channel; a fresh investment may be on the other basis, and the existing one keeps its character.

Is the non-repatriation basis better. It removes the conditions and keeps the proceeds in India; it is better for a family that will use the money in India and worse for one that wants it abroad, and the family decides.

What about the families' own companies in the Gulf. A Gulf company the family owns is not a non-resident Indian and invests as a foreign investor; the basis is personal to the individuals and to the vehicles the rules recognise.

Does the fund's manager need an Indian licence to co-ordinate the families' vehicle. The manager's role for an Indian vehicle is read under India's rules on investment advice and management; counsel reads whether the role needs a registration.

Can the families' vehicle and the fund exit together. Under the co-ordination agreement, to the same buyer, with the families' proceeds staying and the institutions' leaving; the buyer of both pays each class into its own channel.

What if a family member becomes resident in India. The member's status changes and the rules on the investment's continuation apply; counsel reads the transition, and the structure's records show the member's original basis.

Terms used

Non-resident Indian and overseas citizen of India: the holders to whom the rules give the choice of basis.

Repatriation basis: investment as foreign capital with the sectoral conditions and the right to take the proceeds out.

Non-repatriation basis: investment as domestic capital, outside the conditions, with the proceeds staying in India.

Non-resident ordinary account: the Indian account for non-repatriable funds, the usual evidence of the basis.

General limits: the annual allowance for remitting Indian balances, a limit and not a right.

Recognised vehicle: an entity owned by such holders that the rules treat as investing on the basis.

What to read

India's exchange-control rules on investment by non-resident Indians and overseas citizens on the repatriation and non-repatriation bases; the rules on the recognised vehicles; the remittance limits for Indian balances; the property ownership provisions for such holders; the tax law's treatment of their Indian income; the Gulf state's rules on residents' foreign holdings. On this site, the Gulf non-resident, Gulf and India rooms under the development estate.