Government Clarifies Bonus Share Issuance Rules for Foreign Investors in Restricted Sectors
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Synopsis
On April 8, the Indian government clarified that companies in sectors where foreign direct investment is restricted can issue bonus shares to existing foreign shareholders, provided the shareholding pattern remains unchanged.
Key Takeaways
- Issuance of bonus shares to foreign investors is allowed in FDI-prohibited sectors.
- Shareholding structure must remain unchanged.
- Compliance with all relevant laws and regulations is mandatory.
- This clarification is part of the official FDI policy.
- Critical sectors like lottery, gambling, and tobacco are affected.
New Delhi, April 8 (NationPress) On Tuesday, the government provided clarification that Indian enterprises engaged in sectors where foreign direct investment (FDI) is prohibited can still distribute bonus shares to their current foreign shareholders.
However, this practice is only allowed if the overall shareholding structure remains unchanged. The Department for Promotion of Industry and Internal Trade (DPIIT) stated that these transactions must adhere to all relevant laws and regulations.
“The distribution of bonus shares must conform to the applicable rules, laws, regulations, and guidelines,” the DPIIT emphasized in a note.
This clarification has now been officially incorporated into the FDI policy. Consequently, companies in restricted sectors such as lottery, gambling, chit funds, and tobacco manufacturing can issue bonus shares to non-resident shareholders.
The critical stipulation is that no new foreign investment should be introduced, and the proportion of ownership held by both foreign and Indian investors must remain constant.
"An Indian company involved in a sector/activity where FDI is restricted is allowed to issue bonus shares to its existing non-resident shareholders, provided that the shareholding structure does not change following the issuance of bonus shares," the DPIIT noted.
“This clarification pertains to the permissibility of issuing bonus shares to existing foreign shareholders by Indian companies operating in sectors where FDI is restricted,” it added.
Most sectors in India permit FDI through the automatic route, where investors only need to notify the Reserve Bank of India (RBI) post-investment.
Under the government approval route, a foreign investor must secure prior consent from the relevant ministry or department.
Nonetheless, in specific fields such as telecom, media, pharmaceuticals, and insurance, prior governmental approval is obligatory.
Some sensitive sectors, including those mentioned earlier, do not permit any foreign investment. FDI is deemed essential for India's economic growth, particularly in infrastructure development.
It also aids in managing the nation’s balance of payments and bolsters the value of the Indian rupee.
