Hitherto, an Indian company could issue shares to a non-resident against payment obligations only in certain circumstances. These related to “lump-sum technical know-how fee, royalty, External Commercial Borrowings (ECB) (other than import dues deemed as ECB or Trade Credit as per RBI guidelines) and import payables of capital goods by units in Special Economic Zones” subject to applicable conditions.
By way of a notification issued on September 17, 2014, the Reserve Bank of India (RBI) has now allowed companies to issue shares to non-resident investors under the foreign direct investment policy (FDI) “against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA, 1999 or any rules/regulations framed or directions issued thereunder”. However, this is subject to compliance with the terms and conditions of the FDI policy, including sectoral caps, pricing guidelines, etc., and also applicable tax laws.
By expanding the scope of the types of obligations which can be met by issuance of shares, the RBI has conferred more flexibility to Indian companies to be able to meet their obligations through issue of equity. However, since it is limited to obligations the discharge of which is under the automatic route, the scope is quite clear and confined. If the payments require Government approvals, then the concomitant issue of shares cannot be effected under the automatic route.
For a more detailed analysis, see this column in The Firm – Corporate Law in India.