The Department of Industrial Policy & Promotion (“DIPP”) on 28 September, 2010 released its fourth discussion paper in its series of such papers being released on various aspects relating to Foreign Direct Investment (“FDI”) – ‘Issue of Shares for Consideration Other than Cash’.
As per the extant FDI Policy, shares can be issued to non-resident investors against receipt of funds through normal banking channels. In case funds are not received through normal banking channels, a prior approval of the Government is required except where shares are issued against payables on account of External Commercial Borrowings (“ECB”) or royalty payments (including lumpsum technical know-how fees).
In the recent past, Foreign Investment Promotion Board (“FIPB”) has been receiving a number of cases relating to issue of shares for non-cash consideration, such as issue of shares against trade payables, pre-incorporation expenses, import of capital goods/machinery, services, share swaps, intangible assets, etc.
The FIPB Review Book 2009 observed that issue of shares for other than cash consideration requires a much deeper look and with the increasing numbers of such cases, some objective norms would have to be evolved.
The discussion paper gives suggestions on the following different categories of cases for issue of shares for non-cash consideration:
- Import of Capital Goods / Machinery / Equipment: Allotment of shares against such imports can be permitted with a prior approval of the Government
- Pre-operative / pre-incorporation expenses: Since payments made against pre-incorporation expenses can be remitted under automatic route, issue of shares against such expenses can be permitted subject to certain stipulations viz. submission of foreign inward remittance certificate, verification of such expenses by statutory auditors, compliance with other regulatory norms.
- Share Swaps: Considering that share swap transactions are synergetic in nature and supplement FDI, such transactions could be permitted with Government approval subject to fulfillment of certain requirements.
- Issue of shares against intangible assets and Issue of shares against one-time extraordinary payments (such as arbitration awards): Since such transactions might pose problems of valuation, it is suggested in the discussion paper that these might not be considered for inclusion in the FDI policy.
- For cases involving capitalisation of sums towards import of raw materials / trade payables, or services, the discussion paper has not provided a definite approach and has left it open for further deliberations
Conclusion- The DIPP has invited views and suggestions from stakeholders by 31 October 2010 on the above issues relating to inflow of FDI for issue of shares for consideration other than cash, after which it is expected that a policy announcement will be made.
