Overview
On April 7, 2025, the Department for Promotion of Industry and Internal Trade (DPIIT) issued a clarification by Press Note 2, providing much-needed guidance on the issuance of bonus shares by Indian companies operating in sectors where Foreign Direct Investment (FDI) is prohibited. The press note clarifies ambiguity on permission to Indian Companies engaged in sectors prohibited for FDI to issue bonus shares to their existing non-resident shareholders, subject to certain conditions, including adherence to sectoral caps and maintaining the existing shareholding pattern.
Background
Under the Consolidated FDI Policy Circular of 2020 (effective from October 15, 2020), Indian companies were permitted to issue bonus shares to non-resident shareholders, provided such issuance complied with applicable sectoral caps. However, the policy lacked explicit clarity on whether this applies to companies operating in sectors where FDI is completely prohibited.
To address this gap, DPIIT has inserted the following clarification under Paragraph 1 of Annexure 3 of the FDI Policy:
“An Indian Company engaged in sector/activity prohibited for FDI is permitted to issue bonus shares to its pre-existing non-resident shareholders, provided that the shareholding pattern of the pre-existing non-resident shareholders does not change pursuant to the issue of bonus shares.”
Implications of the Clarification
The revised policy explicitly permits Indian companies in FDI-prohibited sectors to issue bonus shares to their existing non-resident shareholders—on the condition that the shareholding pattern remains unchanged post-issuance.
FDI is currently prohibited in following sectors such as:
- Lottery business, Gambling and betting (including franchise, trademark, brand licensing, or management contracts for the same or casinos)
- Chit funds and Nidhi companies
- Trading in transferable development rights (TDRs)
- Real estate business and construction of farmhouses
- Manufacturing of tobacco products (e.g., cigarettes, cigars)
- Atomic energy and railway operations (non-open to private sector investment)
Companies in these sectors are not allowed to issue fresh equity shares to non-residents. The new clarification does not override this restriction. Instead, it applies specifically to bonus issuances to existing non-resident shareholders—typically those who invested prior to the enforcement of the Foreign Exchange Management Act (FEMA), 1999, under Foreign Exchange Regulation Act, 1973 (FERA).
Eligibility for Bonus Issue:
Only Indian companies in prohibited sectors with grandfathered foreign shareholding—i.e., investments made in compliance with FERA (prior to FEMA, 1999) shall be allowed issuing bonus shares to existing shareholders pursuant to this clarification. These companies must also ensure that the bonus share issuance does not alter the percentage of ownership held by non-resident shareholders.
This clarification is particularly relevant for legacy companies which operate in sectors in which FDI is now strictly prohibited. Such Companies had received foreign investment before these prohibitions came into force. Until now, the lack of clarity in FDI policy had constrained their ability to undertake routine corporate actions like bonus issue.
Conclusion
The DPIIT’s clarification is a welcome and pragmatic step toward addressing regulatory ambiguity for legacy companies operating in sectors closed to FDI. By enabling such Companies to issue bonus shares to pre-existing foreign investors without altering the shareholding structure, the clarification enhances regulatory certainty and supports efficient corporate functioning.
Importantly, this clarification applies exclusively to bonus issue, as these do not involve fresh capital infusion. However, issue of rights shares or any instrument that entails additional foreign investment remains prohibited in these sectors under the existing FDI policy.
This move is expected to boost investor confidence, especially in companies with long-standing foreign shareholders, while safeguarding the integrity of India’s FDI policy framework.
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Author: Ridhi Gada- Manager – MMJC
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