Introduction
Foreign Direct Investment (FDI) is one of the important source of funds for developing countries like India. Economic liberalization started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country. With the lowering tax rate for corporates and availability of skilled and cheap labour, India become global hub for businesses since last few years.
Foreign Direct Investment (FDI) in India can be made under the following two routes:
1. Automatic Route
2. Approval Route
Since most of the sectors are now open for private sector and sectoral cap is applicable in a few sectors only, Govt. approval route rarely comes into picture and hence,
The following are the relevant laws applicable to the transaction dealing with issue of shares & securities to foreigners:
- Companies Act, 2013
- FEMA Act, 1999 and FEMA (Non-debt Instrument) Rules, 2019
- Income Tax Act, 1961
Page Contents
There are following two mode of issue of shares to foreigners / foreign companies under the Companies Act, 2013:
1. Right Issue u/s 62(1)a
2. Preferential issue u/s 62(1)c read with Private Placement u/s 42
Procedure of Right issue u/s 61(1)a
The following is the brief process of issue of shares under right offer:
1. Convene a Board Meeting to discuss allotment of shares under right issue mode;
2. Send letter of offer to existing member and give offer to them first;
3. If they accept their right shares, then allot to them;
4. If they renounce in favor of any other person then allot to such other person;
5. If they renounce in favor of person as the board may deem fit then allot to whomsoever board may think fit;
6. Filing of return of allotment in form PAS-3 with the Registrar of Companies;
7. Filing of Form FC-GPR with the RBI.
Under right issue method, Shareholders’ Meeting is not required to be convened since all the members will receive offer letter first in the proportion of their shareholding in the company to subscribe to the issue. This method is comparatively easy and convenient for small unlisted companies having few shareholders only.
Procedure of Preferential issue u/s 62(1)c and Section 42
The following is the brief process of issue of shares under private placement:
1. Convene a Board Meeting to discuss allotment of shares under preferential issue and private placement;
2. Take valuation report from a registered valuer;
3. Convene a General Meeting and pass special resolution of members;
4. File Special resolution in form MGT-14 with the Registrar of Companies;
5. Open Separate bank account for receipt of subscription money;
6. Issue Private Placement offer letter in PAS-4 after filing of special resolution in MGT-14;
7. Allot the shares to third person based on valuation report of RV;
8. Filing of return of allotment in form PAS-3 with the Registrar of Companies;
9. Filing of Form FC-GPR with the RBI.
Under this method, passing of special resolution, filing of form MGT-14, taking of valuation report from registered valuer is required. This method is suitable for large listed companies having many shareholders and Company wants to allot shares to few selected investors only.
Pricing Guidelines
While issuing shares and securities to foreigners or foreign companies, we have to become extra cautious in pricing the instrument as it involves transfer of asset and foreign currency. We need to price our instrument in compliance with the FEMA Act and rules as well as Income Tax Act and its rules. We have to make a combine reading of Companies Act, 2013, FEMA Act, 1999 and FEMA (Non-debt Instrument) Rules and Income Tax Act, 1961 while issue of shares and other securities to foreigners.
1. FEMA Act, Rules and Regulations
Under FEMA Rules, the price of the Capital Instruments of an Indian Company shall not be less than Fair Market Value (FMV) calculated based on any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a CA or a SEBI registered Merchant Banker or a practicing Cost Accountant.
There is no specified internationally accepted pricing method under FEMA Act and rules. Discounted Case Flow (DCF) method, Market Multiple method, Comparable Transactions method, Net Asset Value (NAV) method, etc. are considered as internationally accepted pricing methodology due to its vast usage in international valuation field.
2. Companies Act
Under Companies Act, the valuation of shares and securities issued under preferential issue & Private Placement shall be done by a registered valuer registered with the IBBI. Hence, if you are issuing shares and securities under private placement then additional valuation report shall be obtained from registered valuer for Roc purpose.
3. Income Tax
Under Income Tax Act, the valuation of shares must be done either by SEBI registered Merchant banker in case of DCF method & NAV method and by a Chartered Accountant in case of NAV method. CAs are barred under Income Tax Act for issuing valuation report under DCF method.
Our View:
There are different kinds of valuation requirement in different statutes. Govt. has formalized the valuation profession by introducing Registered Valuer provisions in the Companies Act, 2013 and now we have enough of registered valuers in India for financial and securities asset class. Govt. should amend the provisions in existing Income Tax Act and FEMA Act to allow registered valuer for conducting valuation so that Companies need to take only one valuation certificate from registered valuer for one transaction.
Manner of receipt of payment
An Indian Company issuing shares under FDI should receive the share subscription money through any of the following two modes:
- Inward remittance through normal banking channels;
- Debit to NRE / FCNR(B) / Escrow account maintained with an Authorized Dealer Bank in India.
If the capital instruments are not issued by the Indian company within 60 days from the date of receipt of funds, then the funds are to be refunded within 15 days from date of completion of 60 days through the same channel as receipt of funds.
Reporting Guidelines
Company issuing shares and securities to foreigners / foreign companies are required to report the remittance and allotment in single form FC-GPR. RBI India has simplified the FDI reporting by Indian entities by consolidating different forms in one master form namely Single Master Form (SMF) on the Foreign Investment Reporting and Management System (FIRMS) portal. Only one form FC-GPR is to be filled after allotment within 30 days from date of issuance of shares. The form covers the details of the investee company, main business activity for which investment is made, percentage of FDI as allowed by the FDI policy, route of investment, date of issue of shares, details of foreign investor, type of security issued.
The form should be filed along with the following documents:
- Foreign Inward Remittance Certificate
- KYC of Investor
- Certificate from the Practicing Company Secretary certifying the compliance of FEMA Rules
- Share valuation certificate by the Chartered Accountant or Merchant Banker or Cost Accountant for the shares issued to the foreign investor
- Board Resolution, List of allottees and other secretarial documents for the allotment of shares.
Conclusion
Issuance of capital instruments to foreigners and foreign companies involves complex exercise of documents, valuation, reporting and compliance of multiple laws. If it’s not done professionally, it will put companies into trouble and may attract hefty penalties and litigation. It is essential on the part of the company to hire a professional expert while making any allotment to the foreigners to comply with the applicable laws in letter and spirit.
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