News › Weekly Alert Article

Issuance of Equity Shares to a Non Resident Clarified on Import of Capital Goods

Circular 1 of 2011 effective 1 April, 2011 issued by Department of Industrial Policy and Promotion liberalised the policy for the issuance of equity shares to a non-resident for import of capital goods and pre-operative / pre-incorporation expenses. This development was preceded by the Discussion Paper titled "Issue of Shares for Consideration other than Cash" released on 28 September, 2010. Taxand India looks at the guidelines.

The Reserve Bank of India ('RBI') has, in consultation with the Government of India, issued a circular on 30 June, 2011, permitting issue of equity shares / preference shares under the Government route of the FDI scheme for the following categories of transactions:

a) import of capital goods / machinery / equipment (including second-hand machinery), subject to compliance with conditions
b) pre-operative / pre-incorporation expenses (including payment of rent etc) subject to compliance with conditions.

All requests for conversion are to be accompanied by a special resolution of the company and Government's approval would be subject to pricing guidelines of the RBI and appropriate tax clearance.

The RBI will issue separate notification for incorporating the necessary amendment to the Foreign Exchange Management Regulations.

Taxand's Take


The Circular from the Department of Industrial Policy and Promotion states that Indian companies would be allowed to issue 'equity shares' only for certain specified categories of transactions. This is contrary to the policy in relation to conversion of External Commercial Borrowings ('ECBs') and lump-sum technical knowhow fee / royalty, wherein issuance of 'equity' and / or 'preference shares' is permitted on conversion of ECBs and lump-sum technical knowhow fee /royalty.

The circular dated June 30, 2011 issued by RBI reiterates the provisions for issuance of equity shares under the government route as provided in the Circular 1 of 2011 with one further liberalisation, ie permission for issuance of 'preference shares' under government route which was not covered by the Circular 1 of 2011.

By the issue of this circular, provision for issuance of equity shares under the government route have been brought in line with the policy in relation to conversion of ECBs and lump-sum technical knowhow fee/ royalty.

It is hoped that the regulators will also consider extending these rules for issuance of Compulsorily Convertible Debentures ('CCDs') considering the fact that CCDs are taken into account for the purpose of determining foreign investment into an Indian company.

Read the full article from Taxand India to understand more

Your Taxand contacts for further queries are:
Gokul Chaudhri
T. +91 124 339 5040
E. gokul.chaudhri@bmradvisors.com

Parul Jain
T. +91 124 339 5010
E. parul.jain@bmradvisors.com

Vimi Gupta
T. +91 124 339 5010
E. vimi.gupta@bmradvisors.com

Taxand's Take Author