Indian companies can now offer stock options to employees in China, Nepal, and Hong Kong. Non-resident Indians and expats in these regions can also invest directly in Indian stocks. This change follows a subtle alteration in New Delhi's foreign direct investment rules. The move aims to ease talent management and hiring.
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Mumbai: Indian companies can freely offer stock options to employees posted in China, Nepal and Hong Kong while non-resident Indians (NRIs) and expats located in these countries can directly invest in Indian stocks, thanks to a subtle change in New Delhi's latest communique on foreign direct investment.
In the summer of 2020, as the Covid pandemic set in, the government had issued Press Note 3 (PN3) to shut off Chinese investors buying into Indian companies whose valuation had plunged. The directive said, "...an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route".
In interpreting this, several banks stopped Indian companies from giving stock options to employees seconded to countries sharing land border with India as well as to employees of other nationalities located there.
The new notification, Press note 2 (PN2), issued last week, has removed this hurdle by omitting the phrase 'is situated in'.
"The intent of 2020 circular was different. However, the words 'is situated in' in PN3/2020 posed an obstacle for companies in manning and hiring the right talents. Its deletion under PN2/2026 will help as it removes any scope of literal interpretation of rules.
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"So, Indian passport holders, whether deputed to overseas subsidiaries in land-border countries (LBCs), or employed with entities based in such jurisdictions, or relocating in LBCs for other personal or business reasons, should no longer face restrictions while holding ESOPS or investing in Indian companies, including startups, under the repatriation route," said Pankaj Bhuta, founder of the CA firm P. R. Bhuta & Co specialising in forex regulations and cross-border taxation.
New rule removes restrictive phrase that disallowed direct investment before
FLEXIBILITY TO NRIs from HK, China
The new PN2 would also help citizens of the UK, US and other countries who were residing in that LBC and working for an Indian company. Besides, it ends the ambiguity over whether NRIs and foreign nationals and expats staying in Hong Kong and China can directly purchase Indian shares.
"While investments from neighbouring countries are under Government Route since 2020, the Rule also covered beneficial owners 'situated in' those countries. Thus, even an NRI resident of Hong Kong could not make a direct investment into an Indian entity without prior Government approval! One important change that PN 2 of 2026 brings about is that the Government Route is now applicable only to owners-direct or beneficial-who are citizens of these countries, or are entities incorporated or registered in such countries.
"Thus, a citizen of countries other than our neighbouring countries can invest into Indian entities without prior approval from the government, even though they may be present in or resident of these neighbouring countries.
"This opens up doors for NRIs and other foreign citizens who otherwise had to go through the government approval route merely because they were 'situated in' such neighbouring countries. This is assuming the language of the 2026 Press Note is replicated in the Non-Debt Instrument Rules, an amendment to which is pending," said Rutvik Sanghvi, partner with the CA firm Rashmin Sanghvi & Associates.
A Chinese national or a citizen of any LBC continues to be barred from investing in a company in India under the automatic route. While retaining most of the restrictions, PN2 clears the fog on indirect ownership: now, a fund or a company from a country which does not share a land border-for instance, Singapore-can freely invest in an Indian company as long as less than 10% beneficial ownership (BO) of the investing entity is with citizens of China or other LBCs.
Here, the LBC investors' contribution to the fund or shareholding in the acquiring company must be below 10%.
The 10% threshold is borrowed from anti-money laundering regulations used by banks (handling fund transfers) to identify the natural persons behind the investing entity.
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