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# Can NRIs Buy Unlisted Shares in India? FEMA Rules Explained
India's economic growth story attracts significant NRI interest in early-stage and pre-IPO companies. The good news: NRIs can legally invest in Indian unlisted shares. The complexity: FEMA (Foreign Exchange Management Act) adds rules around which account to use, repatriation limits, and TDS that resident Indians don't face.
This article explains the NRI investment route for unlisted shares in plain terms.
Disclaimer: FEMA and tax rules for NRIs are complex and subject to change. This article describes general principles. Always consult a FEMA-specialist chartered accountant or legal adviser before transacting.
Is It Legal for NRIs to Buy Unlisted Shares?
Yes. Under FEMA, NRIs can invest in Indian private companies under:
- 1FDI Route (Foreign Direct Investment): Purchasing directly from the company as a primary issuance
- 2Secondary Purchase Route: Buying from an existing resident Indian shareholder
Most unlisted share transactions on platforms like Polemarch are secondary purchases — an NRI buying from a resident Indian seller. This route is permitted under FEMA under the general permission for NRI equity investment, subject to:
- No sector that is prohibited for FDI (e.g., certain defence, media, agricultural land)
- Sectoral caps if applicable (certain sectors cap foreign ownership at 49%, 74%, etc.)
- Payment from NRO or NRE account
NRO vs NRE: Which Account to Use?
| Feature | NRO Account | NRE Account | |---|---|---| | Source of funds | Indian earnings, rent, dividends | Foreign earnings remitted from abroad | | Repatriation of principal | Up to USD 1M/year with Form 15CA/15CB | Freely repatriable | | Repatriation of gains | Up to USD 1M/year | Freely repatriable | | Tax on Indian income | Taxable in India | Interest is tax-free (not capital gains) | | Investment basis | Non-repatriable | Repatriable |
Practical implication: If you intend to bring the sale proceeds back to your country of residence, invest from your NRE account. If the investment is from Indian earnings (rent, salary before emigrating), use NRO account and plan for the USD 1M annual repatriation ceiling.
Demat Account Requirements
An NRI needs a demat account linked to their NRO or NRE bank account. Most major Indian brokers offer NRI demat accounts:
- Zerodha, HDFC Securities, ICICI Direct, Kotak Securities
The demat type mirrors the account:
- NRO demat: For shares purchased on non-repatriable basis
- NRE demat: For shares purchased on repatriable basis
The shares in your demat can receive unlisted share transfers exactly the same way as resident Indian demat accounts — via CDSL or NSDL off-market DIS transfer.
The Purchase Process for NRIs
- 1Open an NRO or NRE demat and bank account with a SEBI-registered broker
- 2Complete KYC on Polemarch — NRI KYC requires passport, overseas address proof, NRE/NRO bank account proof, and foreign tax identification number
- 3Fund the transaction from your NRO/NRE account — direct transfer to the platform
- 4Receive shares in your NRI demat via off-market DIS transfer (same as residents)
- 5Notify your bank of the transaction using Form FC-TRS (Foreign Currency Transfer of Shares) for RBI compliance — typically handled by your CA
TDS on Sale: The Key Difference from Resident Investors
When an NRI sells unlisted shares to a resident Indian buyer, the buyer must deduct TDS under Section 195 on the capital gains:
- LTCG (held > 24 months): ~20–23% TDS (including surcharge and cess)
- STCG (held ≤ 24 months): TDS at applicable slab rate (~30–35% for most NRIs)
The NRI can reduce this burden by:
- 1Applying for a Lower Deduction Certificate (Form 13) from the Assessing Officer — valid for the transaction or the financial year
- 2Filing an ITR and claiming refund of excess TDS
Repatriation of Sale Proceeds
| Investment Source | Repatriation | |---|---| | NRE account (repatriable basis) | Freely repatriable after tax | | NRO account (non-repatriable basis) | Up to USD 1M/year with Form 15CA/15CB |
Form 15CA/15CB: Before remitting sale proceeds abroad, an NRI must submit Form 15CA (online) and Form 15CB (CA certificate confirming tax compliance). Your CA handles this.
Sectors Where NRI Investment Is Restricted
Certain sectors have FDI caps that apply to NRIs:
- Newspapers and media: 26% cap for news
- Insurance: 74% under automatic route
- Certain banking categories: caps apply
- Lottery, gambling, chit funds: prohibited
For most tech startups, fintech, consumer brands, and logistics companies — the sectors that dominate the unlisted market — there are no sectoral restrictions on NRI investment.
*Published by the Polemarch editorial team. Not FEMA or tax advice — consult a specialist CA.*