Instruments in which Foreign Direct Investment (FIs) can be raised in India

India has become hot destination for foreign Direct investment. More and more foreign companies are opening an Indian subsidiary to enjoy the benefit of biggest consumer market and largest democracy in the world. Further, with the Indian government’s policy of ease of doing business in India, formation of wholly owned subsidiary in India has become quite a simple process which is also attracting lots of foreign companies to make investment in India. Any investment in wholly owned subsidiary in India by foreign company can be in one of the following modes or instruments.

Instruments by which Foreign Direct Investment can be raised in India:

  1. By way of Equity shares
  2. In form of Convertible Preference Shares
  3. In form of Share Warrants
  4. By way of Convertible Debenture

 

  • Pricing for Convertible and Non Convertible Debentures or/and Preference Shares

(I) Pricing for Equity Shares

  • Pricing for Listed shares

In case of listed shares, Price at which shares are issued to foreign company should not be less than as specified in terms of SEBI guidelines.

  • Pricing for Not Listed Shares

In case of non-listed shares, Pricing should not be lower than fair valuation of shares as worked out by SEBI registered category‐I Merchant Banker or CA in accordance with Discounted Free cash flow method (DFCM)

  • Pricing for Issue of shares under Preferential Allotment

In case of preferential allotment, Price should not be less than specified in RBI guidelines.

(II) For Convertible Debentures & Preference Shares

(a) Pricing or conversion formula for convertible debentures and preference shares is determined at time of issue of shares.

(b) Price at time of conversion shall not to be less than fair price at time of issue of shares for unlisted companies

(c) Valuation be done in accordance to SEBI (ICDR) Regulations for listed companies

(III) For non convertible Debentures & Preference shares

(a) Non convertible or optionally convertible or partially convertible be considered as debt after May 01, 2007

(b) Therefore, norms for ECBs are applicable i.e. Eligible borrowers, Recognized lenders, Maximum amount & Minimum period, End use concept etc.

(c) Valuation is not required for debts.

 

  • Approval from RBI for Transfer of Shares & Convertible Debentures

 Approval from RBI is required for transfer of shares & convertible debentures from residents to

Non-residents of India by way of sale in certain circumstance besides that 100% FIs are permitted under automatic route.

(a) Where price is less than in accordance to guidelines as issued by RBI from time‐to time.

(b) Where non-resident acquire shares & convertible debentures against the deferment of payment of consideration.

 

  • Approval from Govt. of India

Approval from Govt. of India is required for transfer of capital instruments of companies as

Engaged in sector where approval route of Govt of India is needed.

(I) Where transfer from non residents to non residents by way of sale or otherwise.

(II) Where transfer from residents to non residents by way of sale or otherwise

 

  • Approval from RBI for Transferring of Capital Instrument as Gift

Approval from RBI is required for transfer of capital instruments by way of Gift from resident to non-resident of India.

 

  • Issue of Right or Bonus Shares

(I) Indian Company is permitted to issue the right or bonus shares to existing nonresident shareholders subject to sectorial cap if any applicable

(II) However right or bonus shares be issued in accordance with SEBI (Issue of capital and Disclosure Requirements) Regulations, 2009 for listed Companies

(III) Pricing for Issue of right Shares

(a) Price should not be less than as listed at stock exchange

(b) Price should not be less than as offered to resident shareholders for non listed shares.

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Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.

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