Worried over the dip in foreign direct investment in the country, the government is considering revamping the guidelines, and could reintroduce elements that it had disallowed earlier.
The government now plans to allow foreign investment in domestic companies against considerations other than cash, like import of machinery, intangible assets like goodwill and franchise rights, trade payables and various other services. Once the new norms come into place, companies could issue equity shares against import of products from a foreign company instead of paying in cash. The proposal is part of the biannual review of FDI policy set to be announced next month.
Commission brokerage, preliminary expenses, interest paid on capital and other developmental expenditures also fall under this category.
Under the existing FDI policy, shares can be issued to a non-resident only against receipt of funds through normal banking channels. If the funds are not received through normal banking channels, prior approval of the government is required for such issue. The only exception to this condition is the situation where shares are to be issued against external commercial borrowings and royalty payments (including lump-sum technical know-how fees). In such cases, shares can be issued under the automatic route without funds being received specifically for the purpose of issues of shares.
However, some legal experts feel that the move should be put in place with some riders for full compliance. ?One critical element here would be the method of valuation for such consideration. Since the Companies Act, 1956, also allows this ?subject to certain valuation guidelines ? it would provide a level playing field to the foreign investor as well. But any such concession, without adequate valuation methodology, would be an exercise in futility,? said Upendra Sharma, partner, J Sagar Associates.
From time to time over the last two years, the Foreign Investment Promotion Board has been clearing such proposals on a case-by-case basis. But for the last one year, the department has put a complete stop on clearance of such proposals involving issuance of domestic company’s shares against considerations other than cash, citing misuse of the policy by the companies.