The government has allowed Indian companies that are operating in areas where Foreign Direct Investment (FDI) is prohibited to issue bonus shares to its existing foreign shareholders with the condition that it does lead to an increase in their stake in the company.
ITC Ltd will get a leeway with the clarification. British American Tobacco PLC (BAT), holds 25.5% stake in ITC, could now be issued bonus shares subject to the equity cap.
“The basis of the clarification seems to be the fact that a bonus issuance does not entail any inflows of funds. This clarification will allow such Indian companies to effectively capitalise their existing reserves and provide another avenue for cash distribution to their existing shareholders – both foreign and Indian,” senior partner at Saraf and Partners Vaibhav Kakkar said.
“An Indian company engaged in a sector/activity prohibited for FDI is permitted to issue bonus shares to its pre-existing non-resident shareholders provided that the shareholding pattern of the non-resident shareholder does not change pursuant to the issuance of bonus shares,” according to the clarification on FDI policy issued by Department for Promotion of Industry and Internal Trade (DPIIT)
Sectors where FDI is prohibited include tobacco, lottery business, gambling and betting including casinos, chit funds, real estate business or construction of farm houses, atomic energy and railway operations. Barring these sectors, the government allows FDI in all other areas – either through automatic route or with prior government approval.
In sectors where FDI is now prohibited, and originally FDI was made under the government approval route or FDI was generally permitted.
“Until now, issuing bonus shares to foreign investors, even where their shareholding was grandfathered, required prior clarification or approval from RBI, recent being by Godfrey Phillips India Limited — a process that was often time-consuming. This change will significantly streamline corporate actions for companies with existing FDI in restricted sectors, such as tobacco industry, ensuring parity in shareholder rights and improving investor confidence,” partner at Shardul Amarchand Mangaldas & Co Rudra Kumar Pandey said.