Fresh issuance of shares are generally done after receipt of application money from the prospective investor in the bank of the Concerned Company, however in addition to this Companies Act, 2013 also provides provision for allotment of shares in consideration other than cash.
Though this concept looks very easy in case of allotment to be made other than cash to the Indian investors/ promoters but when it comes to the foreign investors, there are various nitty- gritties which one has to keep in mind before proceeding in this direction, which are mentioned in Foreign Exchange Management Act, 1999(FEMA) and various circulars, master directions, notifications, regulations, policy notes etc. issued by the Reserve Bank of India (RBI) from time to time.
In case when the shares are allotted by inviting foreign direct remittance from a prospective investor then we have to follow a very structured and simple procedure which includes obtaining of valuation certificate form the Chartered Accountant and filing Single Master Form in the prescribed time framework (Earlier known as FCGPR, now merged into SMF) on FIRMS portal, a new platform introduced by the RBI for the reporting of foreign direct investment. We provide FEMA Compliances Secretarial Services in Delhi
If any of the requirement/ compliance which are to be followed in letter and spirit is missed out, it may attract imposition of huge penalty and fine on the issuing Company and Directors by the RBI. Therefore, one has to be very careful while making any allotment of shares to the overseas investors in consideration other than cash. It may be apposite to state that this is a very good source of inviting equity from a foreign investor without negotiating much on the valuation of the shares.
FEMA provides following five situations in which allotment of shares can be made to a foreign investor without the receipt of funds:
1. Against any trade payables
As per the RBI’s recent circular, Indian companies now have the increased flexibility of issuing shares under the automatic route against any trade payable by the company, subject to certain conditions. 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 payments relating to import of goods and services, consultancy fees (up to certain prescribed monetary thresholds), commissions, etc.
One needs to be mindful that certain payables, such as pre incorporation expenses, import of capital goods/machinery/equipment (other than second hand machinery), etc., in spite of being permitted under the automatic route, will require prior RBI 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 approval. Moreover, in terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc.
2. External Commercial borrowings (ECBs) other than import dues deemed as ECB or trade credit
Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) (excluding those deemed as ECB) in convertible foreign currency into equity shares/fully compulsorily and mandatorily convertible preference shares, subject to the certain conditions and reporting requirements as imposed by the RBI.
3. against lump-sum royalty
General permission is available for issue of shares against lump sum fee, royalty due for payment, subject to entry route, sectoral cap and pricing guidelines and compliance with applicable tax laws.
4. Technical know- how fees
Issuance of shares against technical know-how fees does not require prior permission of the Government of India or RBI under FEMA or any rules/ regulations framed or directions issued thereunder subject to certain conditions as prescribed by RBI.
5. Import of capital goods by units in Special Economic Zones (SEZ)
FEMA has also provided for issuance of shares to the overseas investors against import of capital by units in SEZ under automatic route. In this case, Chartered Accountant’s Certificate certifying the amount outstanding on the date of conversion shall be required by SEZ units.
In conclusion, above mentioned ways provide possibility for cash strapped Indian companies to raise their share capital without contributing cash and to conserve liquid fluids for working capital requirements and other purposes. That said, holistic understanding of the provisions applicable while adopting any option is required to avoid any repercussion for non-compliance or mis-interpretation of any applicable provision.