FDI: Shares for Consideration Other than Cash

In another of a series of discussion papers, the Department of Industrial Policy & Promotion (DIPP) has issued one on issue of shares for consideration other than cash.

In the past, foreign investment policy has mandated that shares be issued by Indian companies to foreign investors under the automatic route only against remittances received through normal banking channels. The only exceptions to this are conversion of outstanding amounts on external commercial borrowings or fees payable for technical services. Any attempt by Indian companies to issue shares for non-cash consideration under the approval route has generally been looked down upon by the Foreign Investment Promotion Board (FIPB), although it appears that the FIPB has been taking a more liberal approach lately by allowing such issue of shares in a few cases.

The new discussion paper invites views on whether issue of shares for non-cash consideration should be allowed as a matter of policy and more generally (rather than as a mere exception). The discussion paper considers the following scenarios for issue of shares for consideration other than cash:

– Import of Capital Goods/ Machinery/ Equipment

– Services

– Import of Raw Material/ Trade Payables

– Pre-operative/ Pre-incorporation Expenses

– Share Swaps

– Intangible Assets (including franchisee rights)

– One Time Extraordinary Payments (including arbitration awards).

If implemented, this will provide an array of options for infusion of FDI. For instance, freely allowing share swaps will enhance the use of shares as currency for acquisitions by Indian companies, especially for overseas acquisitions.

However, valuation becomes crucial. In terms of installing checks and balances in the use of non-cash consideration, necessary guidelines must be provided for valuation of the assets or rights being received by the Indian company against which shares are issued to a foreign investor.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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