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Issue Of Equity Shares Against Legitimate Dues

Published on Fri, Sep 19,2014 | 18:23, Updated at Fri, Sep 19 at 18:23Source : 

By: Punit Shah, Co Head of Tax, KPMG

In a positive move, RBI has permitted Indian companies, under the automatic route, to issue equity shares against any funds payable, remittance of which does not require prior approval of the Govt. of India or RBI under FEMA or any other rules/ regulations. This is subject to the condition that the issue of equity shares shall be in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc. and the equity shares shall be issued against the funds payable net of applicable taxes.

Hitherto, an Indian company could issue shares/ convertible debentures to a person resident outside India against conversion of lumpsum technical know-how fees, royalty, External Commercial Borrowing (ECB) and import payables of capital goods by a SEZ unit. The RBI Circular extends this flexibility to “any other funds payable” by an Indian company, which means that the Indian company can satisfy its legitimate dues to a person resident outside India by issue of its own equity shares. Issue of preference shares/ convertible debentures by the Indian company is, however, not permitted. This facility is only available to Indian companies that can accept FDI under the automatic route. FDI in Indian companies that require Govt. approval would not be covered by this Circular and would continue to be dealt in accordance with the extant guidelines.

The issue of equity shares against fund payables needs to comply with the FDI pricing guidelines, sectoral caps etc. Currently, an Indian company can issue unlisted shares under the FDI route based on any internationally accepted pricing methodology for valuation of shares on an arm’s length basis, certified by a CA or merchant banker. Further, listed shares can be issued at the price applicable under SEBI guidelines. Thus, after deduction of applicable taxes (such as withholding tax, service tax etc.), the Indian company can issue equity shares to the foreign creditor against any payables, instead of a cash payment. The shares can be issued at par or premium, based on the FDI valuation of the company. Needless to mention, the Indian company would need to comply with the provisions of Companies Act for the issue of shares.

The RBI Circular implies that payments for all dues on account of current account transactions or capital account transactions, which are covered under the automatic route, can be made by issue of equity shares of the Indian company. This could include a wide range of payments such as import of raw material/ semi-finished or finished goods/ capital goods, services related payments such as advisory fees, legal fees, import/ export commission, investment banking fees, underwriting commission, information technology related payment, brokerage, expat salaries etc. It would be interesting to see an Indian company issue its own equity shares against payables on account of dividend to foreign shareholders or interest to foreign debenture holders.

This move would enhance the FDI flow in the country and also conserve the foreign exchange outflow. Besides, it would spare funds for Indian companies, which can be used for other domestic purposes and reduce its working capital requirements. However, issue of equity shares against fund payables would have a dilution impact on existing shareholders of the company and would need to be appropriately dealt with.

Some open issues also need to be addressed. Currently, cash remittance against import payables / pre-incorporation expenses / purchase of shares from non-resident transferor is permissible under the automatic route. However, under the FDI policy, issue of shares against conversion of import payables / pre-incorporation expenses / share swap requires FIPB approval. A plain reading of the Circular suggests that such dues for such transactions may be regarded as ‘funds payable’ for conversion into equity shares. However, a clarification from RBI in this regard would be appreciated.


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