Risks involved for International Investors while investing in Equity Shares of a Company:
- Currency exchange rate fluctuations may affect the value of the equity shares & cash dividends.
- Capital gains on sale of the equity shares may be subject to Indian taxes.
- Since the company is incorporated under the laws of India, one may not affect service of process in jurisdictions outside India upon the company.
- Certain provisions under Indian law discourage a third party from attempting to acquire control of the company.
- Financial statements are prepared in conformity with Indian GAAP, which differs in certain significant respects from IFRS, US GAAP & other accounting principles and auditing standards.
- The equity shares are restricted securities within the meaning of Rule 144(a)(3) under the U.S. Securities Act and may not be sold publicly within the US.
- Under the portfolio investment scheme of the Foreign Exchange Management Act, 1999 registered ‘foreign institutional investors’ may freely purchase or sell equity shares on the Indian stock exchanges on which the equity shares are listed. Under this scheme, a single FII cannot own more than 10% of the total paid-up equity capital of the company. In respect of an FII investing on behalf of its SEBI approved sub-accounts, the investment on behalf of each sub-account cannot exceed 10% of the total paid-up capital of the company, unless the sub-account is held by foreign corporate or individual person resident outside India who are foreign citizens, in which case the maximum permissible limit is 5% for each sub-account. Under present regulations, the maximum permissible aggregate FII investment in the company is restricted to 24% of its total paid-up capital.
- Under current Indian foreign investment regulations applicable to the company, investment by a non-resident, unless made on the stock exchange under the portfolio investment scheme, shall require approval of the government.