GUIDELINES – ALLOTMENT OF SHARES TO FOREIGN PERSON - SERIES - 463

GUIDELINES – ALLOTMENT OF SHARES TO FOREIGN PERSON

Specifically FEMA Guidelines

 Short Summary:

Any investment made by a person resident outside India should be in accordance with FEMA or the rules or the regulations framed thereunder.

A person resident outside India may hold, own, transfer or invest in a security in India if such security was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India.

Such investment will be held by such person on a Non-Repatriable basis.

             i. ‘Capital Instruments’ are equity shares, debentures, preference shares and share warrants issued by an Indian company.

             ii. ‘Foreign Direct Investment’ (FDI) is the investment through capital instruments by a person resident outside India (a) in an unlisted Indian company;

     iii. ‘Foreign Investment’ is any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP

         iv.  ‘Investment on repatriation basis' is an investment, the sale/ maturity proceeds of which are, net of taxes, eligible to be repatriated and the expression 'Investment on non­repatriation basis', will be construed accordingly.

              v. ‘Non-Resident Indian (NRI)’ is an individual resident outside India who is citizen of India.

             vi.‘Overseas Citizen of India (OCI)’ is an individual resident outside India who is registered as an Overseas Citizen of India Cardholder under Section 7(A) of the Citizenship Act, 1955.

        vii.    ‘Resident Indian citizen’ is an individual who is a person resident in India and is citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955.

    

       A.    PROHIBITED SECTORS

  Investment by a person resident outside India is prohibited in the following sectors:

    1.      Lottery Business including Government/ private lottery, online lotteries.

    2.      Gambling and betting including casinos.

    3.      Chit funds (except for investment made by NRIs and OCIs on a non-repatriation basis).

    4.      Nidhi company.

    5.      Trading in Transferable Development Rights (TDRs).

    6.      Real Estate Business or Construction of Farm Houses.

  7.      Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco  substitutes. The prohibition is on manufacturing of the products mentioned and foreign investment in other activities relating to these products including wholesale cash and carry, retail trading etc. will be governed by the sectoral restrictions laid down in Regulation 16 of FEMA 20(R).

  8. Activities/ sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations

   9.      Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities

     Note: A person who is a citizen of Pakistan or an entity incorporated in Pakistan can, only with the prior Government approval, invest in sectors/ activities other than defence, space, atomic energy and sectors/ activities prohibited for foreign investment.

       B.     Allowed – After Government Approval

Any investment by a person who is a citizen of Bangladesh or Pakistan or is an entity incorporated in Bangladesh or Pakistan requires prior Government approval.

      C.    Capital Instruments – Allowed to Issue

Equity Shares	Equity shares are those issued in accordance with the provisions of the Companies Act, 2013 and will include equity shares that have been partly paid
Preference Shares	Preference shares are fully, compulsorily and mandatorily convertible preference share	Non-convertible/ optionally convertible/ partially convertible preference shares shall be treated as debt and shall conform to External Commercial Borrowing (ECB)
Debentures	Debentures are fully, compulsorily and mandatorily convertible debentures.
Share Warrant	Share Warrants are those issued by an Indian Company in accordance with the Regulations issued by the Securities and Exchange Board of India in this regard.

       D.    Entry Route:-

Automatic Route	Automatic Route is the entry route through which investment by a person resident outside India does not require the prior Reserve Bank approval or Government approval.
Government Route	Government Route is the entry route through which investment by a person resident outside India requires prior Government approval

  

       E.     Pricing guidelines

Listed Company	the price worked out in accordance with the relevant SEBI guidelines in case of a listed Indian company or  in case of a company going through a delisting process as per the SEBI (Delisting of Equity Shares) Regulations, 2009
Unlisted Company	he valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.
Convertible Instrument	In case of convertible capital instruments, the price/ conversion formula of the instrument is required to be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com). Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION