Govt issues clarification on issuance of bonus shares to existing foreign investors

The government has clarified that an Indian company engaged in a sector where FDI is prohibited can issue bonus shares to its pre-existing foreign shareholders, provided there is no change in the shareholding pattern.

The issuance of bonus shares must comply with the applicable rules, laws, regulations and guidelines, the Department for Promotion of Industry and Internal Trade (DPIIT) said.

"An Indian company engaged in a sector/activity prohibited for FDI (foreign direct investment) 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 DPIIT's clarification which is inserted in the FDI policy.

It added that this clarification is with regard to the permissibility of issuance of bonus shares to existing foreign shareholders by Indian companies engaged in sectors prohibited for FDI.

FDI in the country is allowed through the automatic route in most of the sectors, while in areas such as telecom, media, pharmaceuticals and insurance, government approval is required for foreign investors. However, in some sensitive sectors, overseas investments are also banned.

Under the government approval route, a foreign investor has to get a prior nod from the ministry or department concerned whereas under the automatic route, an overseas investor is only required to inform the Reserve Bank of India (RBI) after the investment is made.

At present, FDI is prohibited in certain sectors such as lottery, gambling and betting, chit funds, Nidhi company, real estate business, and manufacturing of cigars, cheroots, cigarillos and cigarettes using tobacco.

FDI is important as India will require huge investments in the coming years for its infrastructure sector to boost growth. Healthy foreign inflows also help in maintaining the balance of payments and the value of the rupee.