FDI-Prohibited Sectors: DPIIT Clarifies on Bonus Share Issuance

The Department for Promotion of Industry and Internal Trade (DPIIT) has added a clarification under Para 1 Annexure 3 of the FDI Policy to the effect that Indian companies engaged in FDI-prohibited sectors/activities are permitted to issue bonus shares to their pre-existing non-resident shareholders.

As per Para 1 Annexure 3 of the FDI Policy, FEMA provisions permit Indian companies to issue bonus shares to existing non-resident shareholders, subject to adherence to sectoral caps, if any. Such an issue of bonus shares must be in accordance with other laws, including the Companies Act, 2013, as applicable, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (in case of listed companies), etc.

However, non-resident entities cannot invest in India, in those sectors/activities which are prohibited. Currently, FDI is prohibited in the lottery business, gambling and betting, chit funds, Nidhi companies, trading in Transferable Development Rights (TDRs), real estate business or construction of farm houses, manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes, and activities/sectors not open to private sector investment (e.g. atomic energy).[1]

In a recent instance, tobacco manufacturer Godfrey Phillips India Ltd. reportedly sought clarification and approval from the RBI in respect of the issuance of bonus shares to non-resident shareholders, including those covered under FDI and FPI.

DPIIT’s press note now adds a clarification to Para 1 Annexure 3 of the FDI Policy, stating that Indian companies engaged in FDI-prohibited sectors/activities are permitted to issue bonus shares to their pre-existing non-resident shareholders provided that the shareholding pattern of the pre-existing non-resident shareholders does not change pursuant to the issuance of bonus shares. This clarification will be effective from the date of issue of the applicable FEMA notifications.

The press note further specifies that the issuance of bonus shares must comply with the applicable rules, laws, regulations, and guidelines.

The policy changes are expected to be soon incorporated in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, by the Finance Ministry.

[1] Para 5.1 of the FDI Policy.