Foreign National Issue of Shares [CS Hera Siddiqui]


1. Entry routes for investments in India- Foreign investment is freely permitted in almost all sectors. Foreign Direct Investments (FDI) can be made under two routes—Automatic Route and Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from RBI or Government of India for the investment. Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required. Entry route for foreign investors as well as sector-specific investment limits in India are given in Annex-2.

FDI Policy is formulated by the Government of India. The policy and procedures in respect of FDI in India is available in 'the Manual on Investing in India- Foreign Direct Investment, Policy & Procedures'. This document is available in public domain and can be downloaded from the website of Ministry of Commerce and Industry, Department of Industrial Policy and Promotion— FEMA Regulations prescribe the mode of investments i.e. manner of receipt of funds, issue of shares/convertible debentures and preference shares and reporting of the investments to RBI.

2. Eligibility for Investing in India- A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India, (other than an entity incorporated in Pakistan or Bangladesh) can invest in India, subject to the FDI Policy of the Government of India.

Erstwhile OCBs, who have converted themselves into companies incorporated outside India, can make fresh investments in India under the FDI Scheme provided they are not under the adverse notice of RBI / SEBI.

3. Type of instruments- Indian companies can freely issue equity shares / convertible debentures and preference shares subject to valuation norms prescribed under FEMA Regulations. Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible are considered as debt. As such, the guidelines applicable for External Commercial Borrowing (ECB), viz. eligible borrowers, recognised lenders, amount and maturity, end use stipulations, etc. will apply to such issues. Since these instruments are denominated in rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread permissible for ECBs of corresponding maturity. As far as Debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy.

4. Issue of Rights / Bonus shares- FEMA provisions allow Indian companies to freely issue Right / Bonus shares to existing non-resident share-holders, subject to adherence to sectoral cap, if any. However, such issue of bonus/rights shares have to be in accordance with other laws/statutes like the Companies Act, 1956, SEBI (Disclosure and Investor Protection) Guidelines (in case of listed companies) etc. The price of shares offered on right basis by the Indian company to non-resident shareholders shall not be lower than the price at which such shares are offered to resident shareholders.

Rights issue to erstwhile OCBs:

As such, entitlement of rights shares is not automatically available to Overseas Corporate Bodies (OCBs). OCBs have been de-recognised as a class of investors with effect from September 16, 2003. Therefore, Companies desiring to issue rights shares to such erstwhile OCBs will have to take specific prior permission from RBI.

However, bonus shares can be issued to erstwhile OCBs.

Renunciation of rights by residents to non-residents:

Existing non-resident shareholders are allowed to apply for issue of additional shares / convertible debentures / preference shares over and above their rights entitlements. The investee company can allot the additional rights shares out of un-subscribed shares, subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap.

5. Reporting of FDI- Reporting of inflow:

An Indian company receiving investment from outside India for issuing shares / convertible debentures / preference shares under the FDI Scheme, should report the details of the inflow to the Reserve Bank not later than 30 days from the date of receipt. Details to be reported are:

(i) Name and address of the foreign investor/s

(ii) Date of receipt of funds in foreign currency and its rupee equivalent

(iii) Name and address of the Authorised Dealer through whom the funds have been received, and

(iv) Details of Government approval for the investment, if any.

6. Reporting of issue of shares

After issue of shares/convertible debentures/preference shares, the Indian company has to file Form FC-GPR enclosed in Annex-6, not later than 30 days from the date of issue. The form can be downloaded from the RBI website

Part A of Form FC-GPR has to be duly filled up and signed by the Authorised Signatory and submitted to the Authorised Dealer of the company, who will forward it to the Reserve Bank.

While forwarding the Form, the Authorised Dealer will enclose a KYC Report on the foreign investor. Along with Part A of FC-GPR, the following documents has to be attached by the company:

(i) A certificate from the Company Secretary of the company certifying that

(a) all the requirements of the Companies Act, 1956 have been complied with;

(b) terms and conditions of the Government approval, if any, have been complied with;

(c) the company is eligible to issue shares under these Regulations; and

(d) the company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration;

(ii) A certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Both the above reports have to be submitted to the concerned Regional Office of RBI under whose jurisdiction the registered office of the company is situated.

Part-B of FC-GPR should be filed on an annual basis with the Reserve Bank. This filing has to be done in the month of June every year, for all outstanding investment by way of FDI as well as Portfolio / other investments and by way of re-invested earnings for the previous April to March period. [For example, all Indian companies who have received FDI, Portfolio investments, other investments (such as bonds, debentures etc.) from foreign investors during the period April 2006 to March 2007, have to report in Part B of Form FC-GPR in the month of June 2007, along with their retained earnings during the period.]

The above mentioned three stage reporting mechanism has to be followed wherever there is inflow of funds through normal banking channels or debit to NRE/FCNR account for investment purposes. Moreover, issue of bonus/rights shares or stock options to persons resident outside India directly or on amalgamation / merger with an existing Indian company, as well as issue of shares on conversion of ECB/royalty /lump sum technical know-how fee has to be reported in Form FC-GPR.

7. Issue Price- Price of shares issued to persons resident outside India under the FDI Scheme, shall be worked out on the basis of SEBI guidelines in case of listed companies. In case of unlisted companies, valuation of shares has to be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.

8. Foreign Currency Account- Indian companies which are eligible to issue shares to persons resident outside India under the FDI Scheme will be allowed to retain the share subscription amount in a foreign currency account, with the prior approval of RBI.

9. Remittance of sale proceeds- An authorised dealer bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate has been produced.

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