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NRI Investment in NCD - Eligibility, Process, Rule and Tax

Published on Monday, July 1, 2019 by Chittorgarh.com Team | Modified on Sunday, August 9, 2020

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NRI Investment in NCD - Eligibility, Process, Rule and Tax

While RBI permits NRI NCD investments on repatriable as well as non-repatriable basis, rarely any company allows NRI to invest in a NCD public issue because of strict FEMA rules.

As per notice RBI/FMRD/2016-17/32, RBI permits companies to issue NCDs to NRIs and Foreign Institutional Investors (FIIs).

NCDs (Non-convertible Debentures) offer a good option for secure long term investment to investors looking for investment beyond Stock and Mutual Funds. NCDs are fixed deposits offered by publicly traded companies. They offer fixed returns and good liquidity at a low risk.


NCD (Non-Convertible Debentures) Meaning

An NCD is a fixed deposit used by public companies in India to raise fund for short to long term without diluting their equity. They offer a fixed rate of interest for a fixed period. These debentures cannot be converted in to shares. (Debenture is a long term loan taken by a company. They yield a fixed rate of interest and are secured against the assets.)

NCDs are of two types; secured and unsecured. Secured NCDs are backed by the assets of the issuing company. This means, in the case of default or non-payment, investors can claim payment through liquidation of the assets of the company. Unsecured NCDs are not backed by any assets and are therefore riskier when compared to NCDs. Unsecured NCDs offer high rates to investors in comparison to the secured NCDs.

Key facts about NCDs

  • NCDs maturity period ranges from 90 days to 30 years.
  • NCDs offer a higher rate of return in comparison to Bank Fixed Deposits (FD).
  • NCDs are offered through a public issue known as NCD IPO.
  • They are rated by credit rating agencies before public issue.
  • NCDs are listed at stock exchanges and are tradable instruments.
  • The NCD market is well regulated.
  • The NCDs of companies with good credit rating only succeed.
  • NCD investment process is completely online.
  • The allotted NCDs are credited to your demat account.

NCD can be used effectively:

  • To diversify portfolio
  • Earn a fixed rate of interest
  • Low-risk investment
  • To manage volatility in the stock market

To know more about NCD, visit:


NRI Investment in NCD

NRIs, Persons of Indian origin (PIOs) and FII's are permitted by RBI to invest in NCDs as long as the company offering NCD does allow them. But rarely any company in India allows NRIs to invest in NCD public issue.

Under the eligibility section of the RHP, almost all companies mention the following lines:

Applications from such persons and entities are liable to be rejected:

Foreign nationals, NRI inter-alia including any NRIs who are (i) based in the USA, and/or, (ii) domiciled in the USA, and/or, (iii) residents/citizens of the USA, and/or, (iv) subject to any taxation laws of the USA;


NRI NCD Rules & Regulations in India

NRI NCD investment in India is subject to certain regulations laid by RBI's FEMA regulations. A company incorporated in India can raise funds from NRIs by the way of an investment in NCD subject to the following conditions:

  1. The issue of NCDs is made by a public offer by the issuing company.
  2. The interest rate on NCDs needs to be a maximum of 3% above the prime lending rate of the SBI.
  3. The NCDs is not redeemable before 3 years.
  4. The issuing company is not engaged and shall not engage itself in agriculture, plantation, real estate, Transferable Development Rights (TDRs) and Chit Funds.
  5. The investment is done from money received by remittance from outside India or from the investor's NRE/FCNR account.
  6. The NRI needs to furnish a statement of receipt of remittances and of issue of NCDs to RBI in 30 days of investment.
  7. For investments in NRI NCD on repatriation basis, the combined holding of an NRI under each series of NCDs, must not be over the limit prescribed for issue of equity shares and convertible debentures for FDI.

NRI NCD Taxation (NRI NCD Tax)

The interest earned on NCDs by NRIs is liable for Tax Deduction at Source (TDS). As the minimum redeemable years for NRI investments in NCDs is 3 years, any income earned by the sale of NCDs will be subject to Long Term Capital Gains Tax (LTCG). The LTCG rate on NCDs for NRIs is charged at 20%.

So, if you earn interest of Rs 20,000 from your investments in NCDs then TDS at 20% i.e. Rs 4,000 will be deducted at source and Rs 16,000 will be credited to your account.


NRI NCD Investment - Key Points to Note

  • NRIs are eligible to invest in NCDs on repatriation as well as non-repatriation basis.
  • The NRI NCDs cannot be redeemable before 3 years.
  • NRI needs to furnish a statement of receipt of remittances and of issue of NCDs to RBI in 30 days of investment.
  • TDS for NRIs investments on NCDs is charged at 20 percent.
  • Not all NCDs allow NRI investments. Please check the RHP of NCD to find out if NRIs are eligible to apply in NCD.

Conclusion

Most companies do not offer the option to invest in NCD to NRIs even though RBI permits them (with certain restriction). NRIs also cannot buy these NCDs from the secondary market. Until companies make NRI eligible for NCD investment, it's not possible for NRIs to invest in NCDs.

 

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Frequently Asked Questions

  1. 1. Can NRIs invest in shares, debentures, and Mutual Funds in India?

    NRIs are permitted to make direct investments in shares and debentures of Indian companies. NRIs are also permitted to invest in mutual funds. These facilities are granted both on repatriation and non-repatriation basis.

    To purchase the shares/debentures through a stock exchange on a repatriation basis, NRIs require a PIS approval from RBI which is optional to trade without repatriation benefits.

    The PIS approval is not required to invest in shares by applying in an IPO or for investing in mutual funds.

     

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