Consolidated FDI Policy Circular of 2020

Paragraph Annexure-3 Annexure 3

Chapter: Annexures · Annexures
Text as on: As issued 15 October 2020; Press Notes since are not applied

Annexure-3

Specific Conditions in Certain Cases

(a) in the case of shares of a company listed on a recognized stock exchange in India, at a price as determined by the company;

(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a price which is not less than the price at which the offer on right basis is made to resident shareholders.

2. Prior permission of RBI for Rights issue to erstwhile OCBs OCBs have been de-recognised as a class of investors from September 16, 2003. Therefore, companies desiring to issue rights share to such erstwhile OCBs will have to take specific prior permission from RBI. As such, entitlement of rights share is not automatically available to erstwhile OCBs. However, bonus shares can be issued to erstwhile OCBs without the approval of RBI.

3. Additional allocation of rights share by residents to non-residents Existing non-resident shareholders are allowed to apply for issue of additional shares/fully, compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible preference shares over and above their rights share entitlements. The investee company can allot the additional rights share out of unsubscribed portion, 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.

4. Acquisition of shares under Scheme of Merger/Demerger/Amalgamation Mergers/demergers/ amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/demerger/amalgamation. Once the scheme of merger or demerger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India, subject to the conditions that:

(i) the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap, and

(ii)the transferor company or the transferee or the new company is not engaged in activities which are prohibited under the FDI policy.

Note: Government approval would not be required in case of mergers and acquisitions taking place in sectors under automatic route.

4.1 Issue of Non-convertible/redeemable bonus preference shares or debentures Indian companies are allowed to issue non-convertible/redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR/GDR holders, by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable, subject to no-objection from the Income Tax Authorities.

5. Issue of Employees Stock Option Scheme (ESOPs) / Sweat Equity An Indian company may issue “employees’ stock option” and/or “sweat equity shares” to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, provided that :

a. The scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013, as the case may be.

b. The “employee’s stock option”/ “sweat equity shares” issued to non-resident employees/directors under the applicable rules/regulations are in compliance with the sectoral cap applicable to the said company.

c. Issue of “employee’s stock option”/ “sweat equity shares” by a company where foreign investment is under the approval route shall require prior approval of Government of India.

d. Issue of “employee’s stock option”/ “sweat equity shares” under the applicable rules/regulations to an employee/director who is a citizen of Bangladesh/Pakistan shall require prior approval of the Government of India.

e. The issuing company shall furnish to the Regional Office concerned of the Reserve Bank of India under whose jurisdiction the registered office of the company operates, within 30 days from the date of issue of employees’ stock option or sweat equity shares, a return as per the Form-ESOP.

6. Share Swap In cases of investment by way of swap of shares, irrespective of the amount, valuation of the shares will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country. Approval of the Government will also be a prerequisite for investment by swap of shares for sector under Government approval route. No approval of the Government is required for investment in automatic route sectors by way of swap of shares.

7. Pledge of Shares The transfer of equity instruments of an Indian company or units of an investment vehicle by way of pledge is subject to the following terms and conditions, namely :-

(i) any person being a promoter of a company registered in India (borrowing company), which has raised external commercial borrowing in compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000 may pledge the shares of the borrowing company or that of its associate resident companies for the purpose of securing the external commercial borrowing raised by the borrowing company subject to the following further conditions, namely:-

(A) the period of such pledge shall be co-terminus with the maturity of the underlying external commercial borrowing;

(B) in case of invocation of pledge, transfer shall be made in accordance with these rules and directions issued by the Reserve Bank;

(C) the statutory auditor has certified that the borrowing company shall utilise or has utilised the proceeds of the external commercial borrowing for the permitted end-use only;

(D) no person shall pledge any such share unless a no-objection has been obtained from an authorised dealer bank that the above conditions have been complied with;

(ii) any person resident outside India holding equity instruments in an Indian company or units of an investment vehicle may pledge the equity instruments or units, as the case may be,-

(A) in favour of a bank in India to secure the credit facilities being extended to such Indian company for bona fide purposes,

(B) in favour of an overseas bank to secure the credit facilities being extended to such

person or a person resident outside India who is the promoter of such Indian company or the overseas group company of such Indian company,

(C) in favour of a non-banking financial company registered with the Reserve Bank to secure the credit facilities being extended to such Indian company for bona fide purposes,

(D) subject to the authorised dealer bank satisfying itself of the compliance of the

conditions stipulated by the Reserve Bank in this regard;

(iii) in case of invocation of pledge, transfer of equity instruments of an Indian

company or units shall be in accordance with entry routes, sectoral caps or investment limits, pricing guidelines and other attendant conditions at the time of creation of pledge

Annexure-3

Specific Conditions in Certain Cases

1. Issue of Rights/Bonus Shares
      FEMA provisions allow Indian companies to freely issue Rights/Bonus shares to
      existing non-resident shareholders, subject to adherence to sectoral cap, if any.
      However, such issue of bonus/rights shares has to be in accordance with other
      laws/statutes like the Companies Act, as applicable, SEBI (Issue of Capital and
      Disclosure Requirements) Regulations, 2009 (in case of listed companies), etc. The
      offer on right basis to the persons resident outside India shall be:
         (a) in the case of shares of a company listed on a recognized stock exchange in
                   India, at a price as determined by the company;
         (b) in the case of shares of a company not listed on a recognized stock exchange
                   in India, at a price which is not less than the price at which the offer on right
                   basis is made to resident shareholders.

2. Prior permission of RBI for Rights issue to erstwhile OCBs
      OCBs have been de-recognised as a class of investors from September 16, 2003.
      Therefore, companies desiring to issue rights share to such erstwhile OCBs will have to
      take specific prior permission from RBI. As such, entitlement of rights share is not
      automatically available to erstwhile OCBs. However, bonus shares can be issued to
      erstwhile OCBs without the approval of RBI.

3. Additional allocation of rights share by residents to non-residents
      Existing non-resident shareholders are allowed to apply for issue of additional
      shares/fully, compulsorily and mandatorily convertible debentures/fully,
      compulsorily and mandatorily convertible preference shares over and above their
      rights share entitlements. The investee company can allot the additional rights share
      out of unsubscribed portion, 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.

4. Acquisition of shares under Scheme of Merger/Demerger/Amalgamation
      Mergers/demergers/ amalgamations of companies in India are usually governed by an
      order issued by a competent Court on the basis of the Scheme submitted by the
      companies undergoing merger/demerger/amalgamation. Once the scheme of merger
      or demerger or amalgamation of two or more Indian companies has been approved by
      a Court in India, the transferee company or new company is allowed to issue shares to
      the shareholders of the transferor company resident outside India, subject to the
      conditions that:

(i) the percentage of shareholding of persons resident outside India in the transferee
             or new company does not exceed the sectoral cap, and

(ii)the transferor company or the transferee or the new company is not engaged in
             activities which are prohibited under the FDI policy.

Note: Government approval would not be required in case of mergers and
                     acquisitions taking place in sectors under automatic route.

4.1 Issue of Non-convertible/redeemable bonus preference shares or debentures
      Indian companies are allowed to issue non-convertible/redeemable preference shares
      or debentures to non-resident shareholders, including the depositories that act as
      trustees for the ADR/GDR holders, by way of distribution as bonus from its general
      reserves under a Scheme of Arrangement approved by a Court in India under the
      provisions of the Companies Act, as applicable, subject to no-objection from the
      Income Tax Authorities.

5. Issue of Employees Stock Option Scheme (ESOPs) / Sweat Equity
      An Indian company may issue “employees’ stock option” and/or “sweat equity
      shares” to its employees/directors or employees/directors of its holding company or
      joint venture or wholly owned overseas subsidiary/subsidiaries who are resident
      outside India, provided that :

a. The scheme has been drawn either in terms of regulations issued under the
                Securities Exchange Board of India Act, 1992 or the Companies (Share Capital
                and Debentures) Rules, 2014 notified by the Central Government under the
                Companies Act 2013, as the case may be.

b. The “employee’s stock option”/ “sweat equity shares” issued to non-resident
                employees/directors under the applicable rules/regulations are in compliance
                with the sectoral cap applicable to the said company.

c. Issue of “employee’s stock option”/ “sweat equity shares” by a company
                where foreign investment is under the approval route shall require prior
                approval of Government of India.

d. Issue of “employee’s stock option”/ “sweat equity shares” under the
                applicable rules/regulations to an employee/director who is a citizen of
                Bangladesh/Pakistan shall require prior approval of the Government of India.

e. The issuing company shall furnish to the Regional Office concerned of the
                Reserve Bank of India under whose jurisdiction the registered office of the
                company operates, within 30 days from the date of issue of employees’ stock
                option or sweat equity shares, a return as per the Form-ESOP.

6. Share Swap
     In cases of investment by way of swap of shares, irrespective of the amount, valuation
     of the shares will have to be made by a Merchant Banker registered with SEBI or an
     Investment Banker outside India registered with the appropriate regulatory authority
     in the host country. Approval of the Government will also be a prerequisite for
     investment by swap of shares for sector under Government approval route. No
     approval of the Government is required for investment in automatic route sectors by
     way of swap of shares.

7. Pledge of Shares
     The transfer of equity instruments of an Indian company or units of an investment
     vehicle by way of pledge is subject to the following terms and conditions, namely :-

(i) any person being a promoter of a company registered in India (borrowing
          company), which has raised external commercial borrowing in compliance with the
          Foreign Exchange Management (Borrowing and Lending in Foreign Exchange)
          Regulations, 2000 may pledge the shares of the borrowing company or that of its
          associate resident companies for the purpose of securing the external commercial
          borrowing raised by the borrowing company subject to the following further
          conditions, namely:-

(A) the period of such pledge shall be co-terminus with the maturity of the underlying
           external commercial borrowing;

(B) in case of invocation of pledge, transfer shall be made in accordance with these
           rules and directions issued by the Reserve Bank;

(C) the statutory auditor has certified that the borrowing company shall utilise or has
           utilised the proceeds of the external commercial borrowing for the permitted end-
           use only;

(D) no person shall pledge any such share unless a no-objection has been obtained
           from an authorised dealer bank that the above conditions have been complied
           with;

(ii) any person resident outside India holding equity instruments in an Indian
          company or units of an investment vehicle may pledge the equity instruments or
          units, as the case may be,-

(A) in favour of a bank in India to secure the credit facilities being extended to such
          Indian company for bona fide purposes,

(B) in favour of an overseas bank to secure the credit facilities being extended to such

person or a person resident outside India who is the promoter of such Indian
    company or the overseas group company of such Indian company,
(C) in favour of a non-banking financial company registered with the Reserve Bank to
    secure the credit facilities being extended to such Indian company for bona fide
    purposes,
(D) subject to the authorised dealer bank satisfying itself of the compliance of the

conditions stipulated by the Reserve Bank in this regard;
(iii) in case of invocation of pledge, transfer of equity instruments of an Indian

company or units shall be in accordance with entry routes, sectoral caps or
      investment limits, pricing guidelines and other attendant conditions at the time of
      creation of pledge