Issuance of shares against legitimate dues permitted

In what may be seen as yet another move towards easing India’s foreign direct investment (FDI) regime, the Reserve Bank of India (RBI) has recently issued a notification broadening the categories of non-cash consideration in lieu of which an Indian investee company may issue shares to foreign residents under the automatic route.

Then and now

Previously, share issuances could be made under the automatic route only against certain limited categories of non-cash consideration, namely: lump-sum royalty/technical know-how fee; external commercial borrowings (ECBs) other than import dues deemed as ECBs or trade credit as per the RBI regulations; and import of capital goods by units in special economic zones. Share issuances against other forms of non-cash consideration (pre-incorporation expenses, share swaps, etc.) fell under the approval route.

Per the RBI’s recent circular, Indian companies now have the increased flexibility of issuing shares under the automatic route against “any other funds payable” by the company, subject to fulfilment of three conditions: (a) remittance of the funds against which the shares are to be issued should be permitted under the automatic route; (b) issuance of equity shares should be in compliance with the extant FDI guidelines relating to sectoral caps, pricing, etc.; (c) issuance of equity shares should be against the funds payable net of applicable taxes.

Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai and Bangalore. Aparna Mittal is a partner and Shreya Mukherjee is an associate at the firm. This article is intended for general informational purposes only and is not a substitute for legal advice.