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The Department for Promotion of Industry and Internal Trade (DPIIT) has clarified that Indian companies operating in sectors where FDI is prohibited may issue bonus shares to pre-existing foreign shareholders, provided the shareholding pattern remains unchanged. This regulatory update, now part of the FDI policy, removes the earlier ambiguity that required RBI approval, streamlining corporate actions in sectors like tobacco and real estate. Legal experts noted the move would simplify procedures, enhance parity in shareholder rights, and reassure foreign investors with grandfathered stakes in restricted sectors, while ensuring full compliance with applicable laws and regulations.
The Department for Promotion of Industry and Internal Trade (DPIIT) has clarified that an Indian company engaged in a sector where FDI is prohibited can issue bonus shares to its pre-existing foreign shareholders, provided there is no change in the shareholding pattern. The issuance of bonus shares must comply with the applicable rules, laws, regulations and guidelines. Advertisement
It added that this clarification is with regard to the permissibility of issuance of bonus shares to existing foreign shareholders by Indian companies engaged in sectors prohibited for FDI.
FDI in the country is allowed through the automatic route in most of the sectors, while in areas such as telecom, media, pharmaceuticals and insurance, government approval is required for foreign investors. However, in some sensitive sectors, overseas investments are also banned.
Under the government approval route, a foreign investor has to take prior nod of the ministry or department concerned, whereas under the automatic route, an overseas investor is only required to inform the Reserve Bank of India (RBI) after the investment is made.
At present, FDI is prohibited in certain sectors such as lottery, gambling and betting, chit funds, nidhi company, real estate business, and manufacturing of cigars, cheroots, cigarillos and cigarettes using tobacco.
FDI is important as India would require huge investments in the coming years for its infrastructure sector to boost growth. Healthy foreign inflows also help in maintaining the balance of payments and the value of the rupee.
Commenting on the clarification, Rudra Kumar Pandey, Partner, Shardul Amarchand Mangaldas & Co, said that it is a welcome move that brings much-needed clarity and operational ease for companies operating in sectors where FDI is now prohibited.
"Until now, issuing bonus shares to foreign investors, even where their shareholding was grandfathered, required prior clarification/approval from RBI, recently being by Godfrey Philips India Ltd - a process that was often time-consuming," Pandey said adding this change will significantly streamline corporate actions for companies with existing FDI in restricted sectors, such as tobacco industry, ensuring parity in shareholder rights and improving investor confidence.
Harman Walia, Partner, IndusLaw, said that it also implies that such companies, which had issued bonus shares to their existing non-resident shareholders in the past, were in compliance with the foreign exchange regulations.
Source: PTI
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