Purchase/Sale of Capital Instruments of Indian Company by PROI

Purchase/Sale of Capital Instruments by PROI (Person Resident Outside India) of an Indian company

What are Capital Instruments?

Capital Instruments’ are equity shares, debentures, preference shares and share warrants issued by an Indian company in regards to Purchase/Sale of Capital Instruments by PROI of an Indian company.

Issue by an Indian company

An Indian company is permitted to issue capital instruments to a person resident outside India subject to entry routes, sectoral caps and attendant conditionalities specified for foreign investment.

Purchase on a Stock Exchange in India

A person resident outside India may purchase capital instruments of a listed Indian company on a stock exchange in India subject to following conditions:

• The person resident outside India making the investment has already acquired control of such company in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and continues to hold such control;
• The amount of consideration is paid as per the mode of payment prescribed below or out of the dividend payable by the Indian investee company in which the person resident outside India has acquired and continues to hold control in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, provided the right to receive dividend is established and the dividend amount has been credited to an SNRR account opened in terms of Foreign Exchange Management (Deposit) Regulations, 2016 for acquisition of shares on the recognised stock exchange.

Issue by a Wholly Owned Subsidiary

A wholly owned subsidiary set up in India by a non-resident entity, operating in a sector where 100 percent foreign investment is allowed under the automatic route and there are no FDI linked performance conditions, may issue capital instruments to the said non-resident entity against pre-incorporation/ preoperative expenses incurred by the said non-resident entity up to a limit of five per cent of its authorised capital (as defined in the Companies Act, 2013) or USD 500,000 whichever is less, subject to the following conditions:

1. Form FC-GPR, is filed by the Indian company within thirty days from the date of issue of capital instruments but not later than one year from the date of incorporation.

2. A certificate issued by the statutory auditor of the Indian company that the amount of pre-incorporation/ pre-operative expenses against which capital instruments have been issued has been utilized for the purpose for which it was received should be submitted with the Form FC-GPR.

Pre-incorporation/ pre-operative expenses will include amounts remitted to the investee Company’s account or to the investor’s account in India if it exists or to any consultant or attorney or to any other material/ service provider for expenditure relating to incorporation or necessary for commencement of operations.

Other Modes of Issue

An Indian company may issue equity shares (excluding partly paid shares) to a person resident outside India against any funds payable by it to such person, the remittance of which is permitted under the Act or the rules or the regulations framed or directions issued there under or does not require prior permission of the Central Government or the Reserve Bank under the Act or the rules or the regulations framed or directions issued there under subject to the following conditions:

• Issue of such shares that require Government approval or import dues deemed as ECB or trade credit or payables against import of second hand machinery will be dealt in accordance with respective guidelines;
• The issue of such shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes

An Indian company may issue equity shares (other than partly paid shares) to a person resident outside India against any funds payable by it to such person, the remittance of which has been permitted by the Reserve Bank under the Act or the rules or the regulations framed or directions issued there under.

In case where permission has been granted by the Reserve Bank for making remittance as mentioned above, the Indian company may issue equity shares (other than partly paid shares) against such remittance provided all regulatory actions with respect to the delay or contravention under the Act or the rules or the regulations framed there under have been completed.

An Indian company may issue capital instruments to a person resident outside India under automatic route if the Indian investee company is engaged in a sector under automatic route or with prior Government approval if the Indian investee company is engaged in a sector under Government route against:

(a) Swap of capital instruments;

(b) Import of capital goods/ machinery/ equipment (excluding second-hand machinery) subject to the following conditions:

• The import of capital goods, machineries, etc., made by a person resident in India, is in accordance with the Foreign Trade Policy notified by the Directorate General of Foreign Trade (DGFT) and the regulations on imports issued under the Act;
• There is an independent valuation of the capital goods/ machineries/ equipment by a third party entity, preferably an independent valuer from the country of import along with production of copies of documents/ certificates issued by the customs authorities towards assessment of the fair-value of such imports;
• In case of applications submitted for Government approval:

1. The applications should be accompanied by documents evidencing independent valuation above and a special resolution of the company;

2. The application should clearly indicate the beneficial ownership and identity of the importer company as well as the overseas entity; and

3. Applications (complete in all respects) for capitalization should be submitted within 180 days from the date of shipment of goods.

(c) Pre-operative/ pre-incorporation expenses (including payments of rent etc.), subject to the following conditions:

• Verification and certification of the pre-incorporation/ pre-operative expenses by the statutory auditor;
• Submission of FIRC for remittance of funds by the overseas promoters for the expenditure incurred;
• Payments should be made by the foreign investor to the company directly or through the bank account opened by the foreign investor as provided under the Act or the rules or the regulations framed there under; and
• In case of applications submitted for Government approval:

1. The applications should be accompanied with evidence of documents and a special resolution of the company.

2. The application (complete in all respects) for capitalization being made within a period of 180 days from the date of incorporation of the company.

Mode of Payment & Refund regarding Purchase/Sale of Capital Instruments by PROI

The amount of consideration should be paid as inward remittance from abroad through banking channels or out of funds held in NRE/ FCNR(B)/ Escrow account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

The amount of consideration will include issue of equity shares by an Indian company against any funds payable by it to the investor and also swap of capital instruments where the Indian investee company is engaged in an automatic route sector.

If the capital instruments are not issued by the Indian company within sixty days from the date of receipt of the consideration, the amount so received has to be refunded to the person concerned by outward remittance through banking channels or by credit to his NRE/ FCNR(B) accounts, as the case may be, within fifteen days from the date of completion of sixty days.

In case of partly paid equity shares, the period of 60 days will be reckoned from the date of receipt of each call payment. The forfeiture of the amount paid upfront on non-payment of call money shall be in accordance with the provisions of the Companies Act, 2013 and Income Tax Act, 1961 as applicable.

Refund may be permitted by an authorised dealer provided it is satisfied:

• with the bonafides of the applicant;
• that the funds were received as per the mode of payment prescribed;
• that no part of remittance represents interest on the funds received.

Prior approval of the Reserve Bank will be required for payment of interest, if any, as laid down in the Companies Act, 2013, for delay in refund of the amount so received. Non-compliance of provision regarding refund shall be a contravention of FEMA 20(R) notwithstanding the fact that interest for delayed refund has been paid as per Companies Act, 2013.

The Indian company issuing capital instruments is permitted to open a foreign currency account with an Authorised Dealer in India in accordance with Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015 in regards to Purchase/Sale of Capital Instruments by PROI of an Indian company.

Remittance of Sale Proceeds

The sale proceeds (net of taxes) of the capital instruments can be remitted outside India or credited to the NRE/ FCNR(B) account of the person concerned.