RBI Allows FDI against “Legitimate Dues”

Hitherto, an Indian company could
issue shares to a non-resident against payment obligations only in certain
circumstances. These related to “lump-sum technical know-how fee, royalty, External
Commercial Borrowings (ECB) (other than import dues deemed as ECB or Trade
Credit as per RBI guidelines) and import payables of capital goods by units in
Special Economic Zones” subject to applicable conditions.
By way of a notification
issued on September 17, 2014, the Reserve Bank of India (RBI) has now allowed
companies to issue shares to non-resident investors under the foreign direct
investment policy (FDI) “against any other funds payable by the investee
company, remittance of which does not require prior permission of the Government
of India or Reserve Bank of India under FEMA, 1999 or any rules/regulations
framed or directions issued thereunder”. However, this is subject to compliance
with the terms and conditions of the FDI policy, including sectoral caps,
pricing guidelines, etc., and also applicable tax laws.
By expanding the scope of the types
of obligations which can be met by issuance of shares, the RBI has conferred
more flexibility to Indian companies to be able to meet their obligations
through issue of equity. However, since it is limited to obligations the discharge
of which is under the automatic route, the scope is quite clear and confined.
If the payments require Government approvals, then the concomitant issue of
shares cannot be effected under the automatic route.
For a more detailed analysis, see
this column
in The Firm – Corporate Law in India.

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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