Issuance of shares against legitimate dues permitted

By Aparna Mittal and Shreya Mukherjee, Luthra & Luthra Law Offices

In what may be seen as yet another move towards easing India’s foreign direct investment (FDI) regime, the Reserve Bank of India (RBI) has recently issued a notification broadening the categories of non-cash consideration in lieu of which an Indian investee company may issue shares to foreign residents under the automatic route.

Aparna Mittal
Aparna Mittal

Then and now

Previously, share issuances could be made under the automatic route only against certain limited categories of non-cash consideration, namely: lump-sum royalty/technical know-how fee; external commercial borrowings (ECBs) other than import dues deemed as ECBs or trade credit as per the RBI regulations; and import of capital goods by units in special economic zones. Share issuances against other forms of non-cash consideration (pre-incorporation expenses, share swaps, etc.) fell under the approval route.

Per the RBI’s recent circular, Indian companies now have the increased flexibility of issuing shares under the automatic route against “any other funds payable” by the company, subject to fulfilment of three conditions: (a) remittance of the funds against which the shares are to be issued should be permitted under the automatic route; (b) issuance of equity shares should be in compliance with the extant FDI guidelines relating to sectoral caps, pricing, etc.; (c) issuance of equity shares should be against the funds payable net of applicable taxes.

Key points

It will be important for companies to specifically ascertain whether payables (against which such shares are proposed to be issued) comply with the requirement of the remittance of such funds being permissible under the automatic route. While the RBI has not specifically enumerated the various kinds of payables, it may be apposite to state that this category would broadly include current account payables such as consultancy fees (up to certain prescribed monetary thresholds), commissions, payments relating to import of goods and services (subject to satisfaction of certain accompanying conditions), etc.

That said, one needs to be mindful that certain payables, such as pre-incorporation expenses, import of capital goods (other than second-hand machinery), etc., in spite of being permitted under the automatic route, will continue to require prior governmental approval for their capitalization. Also, issuance of shares in lieu of import dues which are deemed to be either ECBs or trade credit will continue to require such prior governmental approval.

In terms of the instruments which can be issued against “any other funds payable” by the investee company, while the RBI circular mentions only equity shares, the related amendment in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations (FEMA 20) indicates that, apart from equity shares, compulsorily convertible preference shares (CCPS) may also be issued, and accordingly conditions (b) and (c) above would be applicable in the context of issuance of CCPS (in lieu of “any other funds payable”) as well (even though the conditions have been specifically mentioned only in the context of equity shares).

Other requirements

Under the Companies Act, 2013, a contract pursuant to which the payables will be converted (into shares) will need to be filed with the registrar of companies along with the relevant shareholder/corporate approvals, together with the underlying contract (giving rise to the payables). Further, appropriate stamp duty will need to be paid on these agreements (including on oral arrangements), and the valuation of the payable/consideration would need to be duly certified by a registered valuer.

Shreya Mukherjee
Shreya Mukherjee

In cases of non-cash consideration denominated in foreign currency, the Indian rupee equivalent (required for determining the number of shares to be issued) will need to be calculated based on the exchange rate prevailing on the date of the agreement between the parties providing for the conversion.

Further, the valuation of the shares being issued will need to be worked out in accordance with FEMA 20, with reference to the date of conversion, i.e. the date on which the shares (in lieu of the non-cash consideration) will be issued.

The FDI policy prescribes that capital instruments should be issued “within 180 days from the date of receipt of the inward remittance” received through normal banking channels. It would be useful to understand the application of this “180-day rule” to capitalization of “other funds payable”.

In conclusion, this recent notification gives cash-strapped Indian companies a much-needed avenue to settle their dues and yet conserve liquid funds for working capital requirements and other purposes. That said, the real implications of this change need to be tested and a holistic understanding of them will only emerge with the passage of time.

Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai and Bangalore. Aparna Mittal is a partner and Shreya Mukherjee is an associate at the firm. This article is intended for general informational purposes only and is not a substitute for legal advice.


9th Floor, Ashoka Estate

Barakhamba Road

New Delhi – 110 001

Tel: +91 11 4121 5100

Fax: +91 11 2372 3909