By Dr. S. Sankar Ganesh

Executive Summary

Non-Resident Indians (NRIs) have a fantastic opportunity to engage in India’s blossoming private sector as international investment barriers are thinning. Through direct investments, NRIs can take on a major role in a nation advancing toward economic prosperity. This in-depth study will explain the importance of direct investments, how they can increase the size of your portfolio, and what you need to know to successfully navigate the tricky but potentially lucrative world of private company investing. Significant changes have been made to the regulatory environment governing foreign and NRI investments, providing greater flexibility and ease of capital intake. While listed shares, mutual funds, ETFs, debentures, and NCDs are the typical investment vehicles for non-resident Indians (NRIs), investing in unlisted companies has become a very attractive option. This article seeks to shed light on the inherent risks connected with NRI investments in shares of unlisted firms in India, as well as to offer a thorough review of the regulatory nuances and variety of investment opportunities.

A. Introduction

The world of investing in India is complicated and full of opportunities for Non-Resident Indians (NRIs). In India, non-resident individuals enjoy an abundance of investing choices, spanning from debt funds and fixed deposits to stocks and mutual funds. Remaining current on DTAA agreements and comprehending the tax implications are essential for successful investment planning.

Other asset classes that NRIs might invest in include debt funds, recurring deposits, and fixed deposits. There are chances to access the debt market through these investment options. Nonetheless, NRIs are not eligible to participate in several programs, such as the National Savings Deposit Scheme, Small Savings Plans, and the Public Provident Fund (PPF). Furthermore, non-resident Indians are not eligible to invest in the post office or sovereign gold bond schemes.

B. Unlisted Equity Shares – What it is

We refer to shares as unlisted shares or stocks if they are not listed on official stock exchanges. As an example, both JIO and OLA have unlisted shares. Comparably, a lot of businesses haven’t gone public yet since they don’t meet the criteria to be listed on an official stock exchange.

Financial instruments that aren’t listed on public stock exchanges are known as unlisted shares. They are traded over the counter (OTC), which sets them apart from shares that are offered on large stock exchanges. They are frequently linked to smaller or more recent companies that decide not to list on public exchanges for a variety of reasons, like failing to meet market capitalization requirements. Unlisted shares are renowned for providing strong returns and are frequently offered at a discount to draw in investors.

C. Is it safe to invest in Unlisted Equity Shares?

Shares that are not listed are traded over the counter (OTC), with buyers and sellers transacting directly through middlemen. Since this market is unorganized and unregulated, trading unlisted shares carries a credit risk. Nonetheless, unlisted shares are typically exchanged among corporations, large brokerage firms, and institutional or HNI clients. Thus, based on the track record of unlisted share market participants, the risks are reduced. If you can select the appropriate middleman while trading unlisted shares, the danger also goes down.

Nonetheless, the primary risk associated with this investment is that it is uncertain if the firm whose unlisted shares you are purchasing will go public, whether share prices will rise, or whether the company will fail to generate any revenue. Before purchasing any unlisted shares, the only way to invest is to do a thorough examination of the company’s fundamentals and other aspects.

D. Governing Bodies for NRI Investments

India has a regulatory structure in place to safeguard investors and keep the markets in order. NRI investments are supported by the FEMA Act and RBI recommendations. The kinds of businesses that non-resident Indians (NRIs) can invest in, the amount of money that can be invested, and the procedures governing the repatriation of the profits are all outlined in these regulations. It is possible to structure investments that maximize financial returns while adhering to the law by working with an experienced specialist to navigate these rules.

E. Methods to Invest in Unlisted Companies

1 Pre – IPO Investments
2 Investment in Startups
3 Buying ESOPs directly from Employees
4 Investing in PMS Schemes of Unlisted Shares
5 Purchase from Promoters
6 Through Crowdfunding Platforms

Pre – IPO Investments

Companies that are not listed on a stock exchange are known as pre-IPO companies. As an NRI, can invest in these pre-IPO companies without the use of exchange houses. The share will be deposited into NRI Demat Account. By contacting an unlisted share broker, NRI can invest in pre-IPO businesses.

Investment in Startups

NRIs might look at opportunities to fund unlisted firms with significant room for expansion. Although riskier, well-timed startup investments can generate substantial returns.

Buying ESOPs directly from Employees

Through Employee Stock Ownership Plans (ESOPs), NRIs can buy unlisted shares from employees who want to sell at a set price.

Investing in PMS Schemes of Unlisted Shares

A safer option to invest in unlisted companies is through Portfolio Management System (PMS) plans run by qualified fund managers. For NRI investors, risk is reduced by diversification and proactive management.

A charge is required to access the PMS. A variety of asset classes, including bonds, mutual funds, and stocks, are included in the investments, which might potentially increase investor income and growth. The ability to purchase unlisted shares is one such investment category that many PMS offer.

Purchase from Promoters

Promoters typically own stock in the business, and through private placement, they can sell their shares to a limited number of accredited individual investors. NRIs can purchase unlisted shares directly from the company’s promoters.

Through Crowdfunding Platforms

Through crowdfunding, a community of investors including non-resident Indians can provide unlisted shares to firms for funding.


Investments in shares of an unlisted Indian firm may be undertaken in accordance with the rules and guidelines established by the Reserve Bank of India and the Government of India, provided that the FEMA provisions are met. ‘Foreign direct investment’ (FDI) is defined as an investment made in unlisted shares by a non-resident Indian (NRI), including individuals living in Nepal and Bhutan.

G. How NRIs can make investment in Shares of Unlisted Company

i. Modes of Investment
ii. Sectoral Caps
iii. Payment Modes

Modes of Investment

Subject to sectoral caps and price requirements, non-residents may invest automatically in shares of an unlisted Indian firm.

Sectoral Caps

Permitted Sectors with 100% FDI

Foreign investors can establish a 100% equity business in India in certain areas without first receiving government clearance; however, an FC-GPR form notification must be filed with the RBI upon receipt of the FDI Remittance. The goal of this policy is to promote foreign investment in sectors including manufacturing, information technology, and some service industries that are critical to economic expansion. The goal is to draw in international investment, know-how, and technology to expand the capabilities of the home market.

In some industries, foreign direct investment (FDI) is allowed, but only up to a particular amount and frequently under certain restrictions. These restrictions are in place for a variety of reasons, including strategic concerns, competitive balance, and industry protection. For instance, there may be a cap on FDI (such as 49%, 74%, etc.) in industries like banking, broadcasting, or defense to guarantee that control and decision-making stay primarily in domestic hands or to protect national interests. Other legislative restrictions, such local collaborations, certain approval procedures, or operational rules, frequently accompany these limitations.

S.No Sector FDI Limit Entry Route
1. Banking- Public 20% Government
2. Banking- Private 74% 49%- Automatic.
Above 49-74%- Government
3. Insurance 74% Automatic
4. Asset Reconstruction Companies 100% Automatic
5. Credit Information Companies 100% Automatic
6. White Label ATMs 100% Automatic
7. Pension sector 49% Automatic
8. Agriculture & Animal Husbandry 100% Automatic
9. Plantation sector 100% Automatic
10. Mining 100% Automatic
11. Petroleum & Natural gas refining 100% Automatic
12. Defence manufacturing 100% Automatic upto 49%.
Above 49% under Government route.
13. Broadcasting teleports 100% Automatic
14. Broadcasting content services 49% Government
15. Print media, dealing with news 26% Government
16. Publishing/printing of scientific and technical magazines/specialty journals 100% Government
17. Civil aviation- Airports 100% Automatic
18. Civil aviation- Air transport services 100% Automatic up to 49% Above 49% under Government route.
19. Telecom 100% 49%- Automatic. Above 49%- Government
20. Railways 100% Automatic
21. Financial services’ activities regulated by RBI, SEBI, IRDAI, other regulator 100% Automatic
22. Pharmaceuticals (Greenfield) 100% Automatic
23. Pharmaceuticals (Brownfield) 100% Automatic upto 74%, above 74% under Government
24. Power exchanges 49% Automatic
25. Construction development 100% Automatic
26. Industrial parks 100% Automatic
27. Satellites 100% Government
28. E-commerce activities 100% Automatic
29. Private security agencies 74% Automatic up to 49%. Above 49%- 74% under Government
30. Single brand retail trading 100% Automatic up to 49%. Above 49% under Government
31. Multi-brand retail trading 51% Government
32. Duty-free shops 100% Automatic
33. Food products manufactured or produced in India 100% Government
34. Cash & carry wholesale trading 100% Automatic
35. Biotechnology 100% Automatic
36. Electricals machinery and system 100% Automatic
37. Food processing 100% Automatic
38. Ports and shipping 100% Automatic
39. Textiles and garments 100% Automatic
40. Tourism and hospitality 100% Automatic
• – Subject to change as per Government Policies – Kindly Refer
Knowing that there are two ways to process foreign direct investment (FDI) in the approved sector is crucial. Applications are processed automatically without requiring prior authorization if they fall under the permitted FDI limit and are unaffected by Press Note 3. All other FDI cases in permitted sectors, on the other hand, are handled via the Government Route, sometimes referred to as the approval route. Examples of these cases include those that surpass the allowable FDI % or are impacted by PN-3. The federal government must give prior authorization in these situations. A comparison of the government and automobile FDI pathways is also available for reading.

Payment Modes

– Inward Remittance
– Debit to NRE/FCNR Account
– Escrow Account

• The shares can be paid for by an inward foreign currency remittance conducted using regular banking methods.

• To make the payment, non-residents may also utilize money from their FCNR (Foreign Currency Non-Resident) or NRE (Non-Resident External) accounts.

• The consideration money may be paid via an authorized dealer (AD) bank’s non-interest-bearing Indian Rupee escrow account.

H. Procedure for NRI Investment in Private Listed Companies

1. Ensure Eligibility
2. Compliance with Pricing Guidelines
3. Reporting Obligations
4. Remittance of Funds
5. Escrow Account (if Applicable)
6. Regulatory Approvals (if Applicable)
7. Use of Dividends for Payment
8. KYC & Documentation for NRI Investment in Unlisted Companies Shares
9. Annual Compliance

• Verify whether the NRI’s proposed investment complies with all applicable laws and the foreign direct investment (FDI) policy.

• Regarding unlisted firms, the pricing of their issues is established through an arm’s length appraisal carried out using an internationally recognized pricing methodology.

Chartered accountants, merchant bankers registered with SEBI, practicing cost accountants, and other specialists must properly certify the valuation. A layer of assurance is added to the valuation technique through this certification process.

• Form FC-TRS (Transfer of Shares) must be submitted to the Authorized Dealer (AD) Category I bank within 60 days of the consideration amount’s receipt or remittance date to report the transaction.

• Remitting the investment proceeds should be done via standard banking methods. This may involve a debit from the NRI’s NRE/FCNR account or an inward remittance.

• Make sure that the Foreign Exchange Management (Deposit) Regulations, 2000, are followed if an escrow account is being used.

• Verify if, given the type of investment or industry, any regulatory approvals are needed. Certain industries might impose limitations on the amount of foreign investment or necessitate certain authorization. To invest in unlisted companies, non-resident individuals (NRIs) must be aware of and abide by any sector-specific laws.

• Verify that the requirements for using dividends to pay shares are met if they apply.

• The KYC procedure has made it easier for NRIs to invest in unlisted shares. The required paperwork comprises an NRI Demat account, a PAN card, and other important documents. It is important to differentiate bank accounts into two categories: Non-Resident Ordinary (NRO) and Non-Resident External (NRE).

I. Unlisted Shares Valuation

The Fair Market Value (FMV) approach is used in the valuing of shares that are not listed. FMV is determined by the underwriters or the investment bankers because unlisted shares have no true market price because they are not listed on the stock exchange.

The book value of all the company’s liabilities (L) is subtracted from the book value of all its assets (A) to determine the fair market value. The amount obtained is then divided by the total paid-up equity share capital (PE) as shown on the company’s balance sheet and multiplied by the paid-up value (PV) of equity shares.

FMV = (A – L) * PV/PE

An alternative method for determining the value of unlisted shares is the Discounted Cash Flow (DCF) method. To determine the shares’ current worth, all projected future cash flows are first discounted at a specific rate. This strategy is popular among investors in unlisted shares, but it is challenging because all the cash flows are predicted rather than actual.

J. Transferring of Shares from Resident Indian to Non-Resident Indian

Navigating the legal frameworks of the Companies Act of 2013 and the Foreign Exchange Management Act of 1999 (FEMA) is necessary when transferring shares from a Resident of India (ROI) to a Non-Resident of India (NRI). To guarantee a smooth and lawful share transfer process, this article explains the specific steps, legal sections, provisions, and form numbers.

1. Legal Framework and Definitions

1.1 FEMA and Capital Account Transactions

Section 2(e) of the Foreign Exchange Management Act, 1999 defines Capital Account Transactions. The transfer of financial assets and liabilities between residents and non-residents is covered by these transactions.

1.2 FEMA Regulations 2017

Capital account activities pertaining to the transfer of securities are explicitly governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, which came into force on November 7, 2017.

2. Permissible Capital Account Transactions by NRI

Investment in securities issued by Indian corporations is permitted for non-resident Indians (NRIs). It is also acceptable for a person of another country to invest in an Indian company.

As permitted by FEMA or with the Reserve Bank of India’s approval, NRIs are able to transfer shares within India (RBI). Transfers involving businesses operating in industries that need government approval must have approval.

3. Reporting of Share Transfer

• Obtain the NRI’s Receipt of Consideration.

• Obtain the Know Your Customer (KYC) documents and the Foreign Inward Remittance Certificate (FIRC) from the AD Category-I Bank.

• Within sixty days of the date the consideration for the transfer of shares was paid, submit Form FC-TRS.

• Register the reporting entity at, the RBI website.

• Finish the business registration process.

• Submit Form FC-TRS, which is only available to Indian citizens (ROIs).

• If the form is submitted within the allotted period, there is no penalty.

3.1 Required Documents

• Chartered Accountant’s Fair Value Certificate.

• SH4 Form, Securities Transfer Deed.

• Acquired FIRC and KYC from AD Category-I Bank.

• A purchase agreement for securities.

• A signed consent letter allowing the seller and buyer to transfer shares.

RBI approval is guaranteed if all prerequisites are completed within the allotted period. RBI notifications and possible investigations against the involved entity may result from non-compliance.

4. Procedure for Share Transfer as per Companies Act, 2013

According to Sections 2(81), 44, and 58(2) of The Companies Act, 2013, shares are defined as freely transferable and movable securities.

The Companies Act of 2013 specifies the procedure for registering share transactions under Section 56. After submitting the required share transfer document, the company registers the transfer. SH-4 is the required form for this purpose.

A thorough synopsis of the share transfer agreement is included in SH-4. Within sixty days from the date of the share transfer, it needs to be submitted to the corporation.

K. Tax Implications for investing in Unlisted Companies Shares

The capital gains tax rate is based on the length of time unlisted shares are held. Realized during a 24-month period, short-term capital gains (STCG) are subject to taxation based on the investor’s appropriate tax slab. Shares held for longer than 24 months may have long-term capital gains (LTCG), which are taxed at a fixed rate of 20% and are eligible to indexation benefits. Furthermore, there will be no indexation benefits and a 10% tax rate.

L. Conclusion

NRIs have opportunities and difficulties while investing in unlisted Indian enterprises. Despite the significant potential for higher returns, NRIs must understand the dangers involved, do extensive due research, and adhere to regulatory regulations. The regulatory environment is changing, and recent changes show that efforts have been made to find a balance between protecting investors and promoting investment. If NRIs are interested in investigating unlisted shares, they should use reliable middlemen, keep up with any changes to the law, and approach these investments methodically. NRIs continue to find the prospect of making profitable and strategic investments in unlisted companies to be enticing, especially as the Indian market develops.

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Posted on: April 3rd, 2024

Disclaimer: This article is only for general information and is not intended to provide legal advice. Readers desiring legal advice should consult with an experienced professional to understand the current law and how it may apply to the facts of their case. Neither the author nor and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of

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