Allotment of Securities to Foreign residents

ALLOTMENT OF SECURITIES TO FOREIGN RESIDENTS

Overview of Foreign Direct Investment

Foreign Direct Investment (FDI) is one of the important sources of funds for countries where capital is not readily available. In India FDI is an important monetary source for it’s economic development. Economic liberalization started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country. Foreign Companies invest in India either through the approval route or automatic route to take benefits of cheaper wages and changing business environment of India.

Routes of receiving foreign investment by Indian companies

Definition of FDI as per Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017

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Capital Instruments through which foreign Companies can make Investment

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Modes of issue and Allotment of securities

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Determination of price of Capital Instruments to be issued under FDI Policy

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Mode of Payment under FDI Scheme

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Procedure for allotment of securities to Foreign Nationals and Foreign Companies through Private Placement (one of the Mode of Allotment)

  • Convene Board Meeting (as per Section 173 and SS-I) to approve following:-
    • Issuance of Shares
    • Draft offer letter under PAS-4.
    • Approval of valuation report issued by chartered accountant
    • Opening of a separate bank account.
    • To approve and Issue Notice of General Meeting. (As per SS-2)
  • Convene EGM for following Purpose:-
    • Approve Form PAS-4 and
    • Approve the Issuance of hares
  • Within 30 days after passing of Special Resolution:-
    • Issue offer letter
    • File MGT-14 with Registrar
  • Upon receipt of the funds, from abroad convene a Second board meeting to approve the following:
    • Allotment of the Shares to foreign investor
    • Authorizing representatives of Indian Company to file returns with
      • ROC(including the Form PAS-3 ) and
      • Reserve Bank of India(“RBI”) (including Form SMF (FC-GPR))
  • Indian company shall File the return of allotment in Form PAS-3 with the ROC within 15 days of the date of allotment of the Shares.
  • Indian company shall File FC-GPR with the Reserve Bank of India within 30 days of allotment of the Shares
  • Indian company deliver a copy of the acknowledgment of the Form FC-GPR received from RBI to foreign investor.
  • Indian Company issue share certificate
    • within 60 days from the allotment of shares or
    • 60 days from the date of receipt of the consideration

whichever is earlier

  • Indian Company pay stamp duty on the value of shares issued within 30 days of issue share certificate

In case Capital Instruments are not issued within the stipulated time period

If the Capital Instruments are not issued within 60 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR(B) / Escrow account, the amount of consideration shall be refunded to the person concerned by outward remittance through banking channels or by credit to his NRE/ FCNR(B) accounts, as the case may be within fifteen days from the date of completion of those sixty days.

Reporting of FDI by Indian Company

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Filing of Form FC-GPR (Reporting of issue of Shares)

After issue of shares (including bonus and shares issued on rights basis and shares issued on conversion of stock option under ESOP scheme)/ partly paid shares to the extent equity shares are called up/ convertible debentures / convertible preference shares/warrants to the extent equity shares are called up, the Indian company has to file Form FC-GPR, through it’s AD Category I bank, not later than 30 days from the date of issue of shares.

    • Link to file Form FC-GPR
      • Go to FIRMS website at https://firms.rbi.org.in and Login into SMF (in case of new user create registration under entity master and after that as business user)
    • Documents to be attached with the FC-GPR Form
      1. Valuation certificate from the person authorized as per FEMA 20 (R)
      2. Declaration and CS certificate
      3. Board resolution passed for the allotment of Shares
      4. In case of Inward remittance from abroad through:-
        5. (a) Banking channel - FIRC and KYC of the foreign investor
        (b) NRE/FCNR- Debit statement
        (c) Escrow A/c- Debit statement

Annual return on Foreign Liabilities and Assets

  1. Annual return on Foreign Liabilities and Assets should be filed on an annual basis by the Indian company, directly with the Reserve Bank.
  2. This is an annual return to be submitted by 15th of July every year, pertaining to all investments by way of direct/portfolio investments/reinvested earnings/other capital in the Indian company made during the previous years (i.e. the information submitted by 15th July will pertain to all the investments made in the previous years up to March 31).
  3. The details of the investments to be reported would include all foreign investments made into the company which is outstanding as on the balance sheet date.
  4. The details of overseas investments in the company both under direct/portfolio investment may be separately indicated

Proposed Reforms under FDI policy by GOI due to COVID 19 pandemic

The Govt. of India has reviewed the extant of FDI policy for curbing the opportunistic takeovers/acquisitions of Indian Companies due to the Current COVID-19 pandemic. The amendments are contained in Press Note No. 3 (2020 Series) dated April 17, 2020 issued by the Department for Promotion of Industry and Internal Trade, Government of India, and will become effective from the date on which the principal foreign exchange regulations are amended.

As per the proposed Reforms

  1. All the investments by entities incorporated in a "country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country" will require prior regulatory approval.
  2. In the event of any transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of paragraph 1 above, such change in beneficial ownership will also require prior regulatory approval.

Recent Announcement by Finance Minister

  1. While unveiling fourth tranche of measures to make India self reliant Finance Minister Nirmala Sitharaman announced that FDI limit in Defense manufacturing under automatic route will be raised from 49% to 74%.

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