The FDI policy allows issue of shares by Indian companies to foreign investors only against cash remittances received through normal banking channels. However, the only exceptions to this are External Commercial Borrowings outstanding as well as payment obligations towards lump sum fee or royalty for technical collaborations. Any other type of transaction involving an issue of shares to foreign investors for consideration other than cash requires approval of the Government of India through the Foreign Investment Promotion Board (FIPB).
In this background, and in order to provide more investment options, the Government issued a discussion paper in September 2010 considering additional methods of issue of shares for consideration other than cash.
Below
is a table depicting the cases which have been accepted, prohibited and granted
approval on case to case basis.
SR.
NO.
|
ACCEPTED
|
PROHIBITED
|
APPROVAL
ON CASE TO CASE BASIS
|
1.
|
Import on capital
goods / equipment (including second hand machinery)
|
Against Import of
raw material / trade payable
|
Share swaps
|
2.
|
Pre-operative /
pre-incorporation expenses (including payment of rent etc.)
|
In lieu of services
|
Against one-time
extraordinary payments
|
3.
|
|
Against Intangible
assets (including franchisee rights)
|
Sweat equity shares
|
4.
|
|
Advance receipt for
export
|
Against outstanding
loan
|
5.
|
|
Against dividend payable
|
|
6.
|
|
Other kinds of
consideration / unclear source of money for issue of shares
|
|
Only the following additional methods have been
accepted for issue of shares for non-cash consideration:
1. Import of Capital goods / machinery / equipment (including second-hand machinery)
Any import by a resident in India has to be in accordance with the Export / Import Policy issued by Government of India. Payment against the same also needs to be in compliance with the Foreign Exchange Management Act, 1999 (FEMA) provisions relating to imports. Further, import of such goods is fully documented by the customs authorities, who also make an assessment of the fair value of such imports. Since adequate checks on the fair value of such imports are available, allotment of shares against the latter can be permitted, with prior Government approval.
2. Pre-operative / Pre-incorporation expenses (including payment of rent etc.)
A significant amount of expenditure is incurred between the conceptualization of the company, its incorporation and commencement of commercial production. This expenditure is often capitalized. If the overseas promoter has incurred these expenses, it is often proposed that shares be issued against such expenditure. Considering that payments made against pre-incorporation are allowed to be remitted under the general permission route, it could be considered whether issue of shares against such expenses should also be permitted.
With regards to the following options, the FIPB has granted
approval on case to case basis.
1. Share swaps
Share swap transactions are based on the mutual benefits accruing to both, the Indian entity as well as the foreign entity. They reduce the need for cash flows, while simultaneously meeting the end objectives of investment. This framework presumes swap of shares in an Indian company with shares in a foreign company. Such investments are governed by the Overseas Direct Investment (ODI) guidelines and procedures prescribed under FEMA/RBI. The FIPB considers share-swap proposals on a case to case basis. Values of shares to the entities involved should be comparable for obtaining FIPB approval.
2. Issue of shares against one-time extraordinary payments
Companies may need to issue shares in Joint Venture Company in consideration of business in the form of assets, liabilities and accumulated profits; issue of shares in lieu of an award sum payable in an arbitration case. The FIPB shall grant approval after considering applications on case to case basis and if the same is within the ambit of FEMA.
.
3. Issue of Sweat Equity Shares
Generally the sweat equity shares are issued to promoters to compensate them for their contribution in the formation of the company/execution of projects. Such issue to non-residents is permitted under the Companies Act and so the FIPB has been liberal in granting approval for the same.
4. Issue of shares against outstanding loan
There have been times when non-residents have cleared obligations or incurred expenses on behalf of companies thereby creating loans / amounts due to them. In order to repay such loans, companies can issue shares against the same. This would need approval of the FIPB.
The FIPB has
prohibited the issue of shares against the following options.
1. Issue of shares against import of raw material / trade payable
It should be noted that such issue has not been granted approval by the FIPB. Issue of shares against raw material imports / trade payables is in the nature of recurring current account transaction which falls outside the scope of FDI.
2. Issue of shares in lieu of services
This option too is not permitted by FIPB as it is a current account transaction. Companies with commitments to avail services from non-residents may desire to issue shares in lieu of payments for such services availed. The main drawback would be the ambiguity in determining the value of services rendered and to fix a particular method to determine the same. The valuation of services imported is subjective and the authentication as whether such services were actually rendered/delivered makes it difficult to get permission for the same.
3. Issue of shares against intangible assets (including franchisee rights)
The need for issue of shares against intangible assets has often been expressed. There are, however, no widely accepted criteria for valuation of intangibles. There is a possibility that such cases may lead to situations of issue of excess shares, in the absence of detailed criteria. Since such cases may pose significant challenges in terms of valuation, and would require evolution of detailed guidelines, the balance of convenience may lie in not considering such cases for the present.
4. Advance receipt for export
The FIPB has not favoured the issue of shares against export advance received, as the same in not within the purview of FEMA and is in the nature of a current account transaction.
5. Issue of shares against dividend payable
The Companies Act, 1956 prohibits the issue of shares against dividend. The company cannot treat dividend declared as debt due to the non-resident investor and set it off by issuing shares against it. The dividend payable to a non-resident needs to be remitted through the banking channels to the non-resident investor.
6. Other kinds of consideration / unclear source of money for issue of shares
There may be very peculiar and one time situations when shares may be issued against expenses incurred. Purchase of land, issue of shares against amount received by invoking a bank guarantee, obligations under settlement schemes, payment of management service fee, payment of foreign branch office costs are some examples where shares can be allotted for consideration other than cash unless prior approval of FIPB has been obtained.
CONCLUSION
Such changes enable Indian companies to procure equipment and services from foreign enterprises (particularly collaborators) when they are either unable to pay cash, or when a cash transaction is not desirable from a financing standpoint.
It allows payment by Indian companies through issue of its own shares. Such a method also ensures that suppliers and collaborators have an interest in the success of the Indian company's business by taking a stake in it (and thereby assuming risk).
