In a significant liberalisation of the foreign direct investment policy, the government has permitted the issuance of additional equity shares to a foreign investor that already has shareholding in a company in lieu of its dividend income.
The approval will, however, be subject to the regular conditions on valuation and pricing norms laid down by the Reserve Bank of India.
Such transactions are not permitted under the prevailing policy.
The issue of shares other than against cash requires FIPB (Foreign Investment Promotion Board) clearance.
But, the policy does not provide for the issuance of equity shares in lieu of dividend to foreign investors.
However, according to the international practice, reinvested earnings are considered foreign direct investment in many countries.
That is why, the Department of Industrial Policy & Promotion had referred the issue to the FIPB for suggestions on a policy change or to take a call.
The issue came up before the government when the Bengaluru-based Grameen Financial Services Pvt Ltd, engaged in the business of credit financing to groups and individuals, as well as providing credit, thrift and other financial services, made an application to the FIPB.
Change in keeping with global practice
of treating reinvested earnings as FDI. The company wanted approval for the issuance of 28,409 equity shares to its foreign investor, Aavishkar Goodwell
India Microfinance Development Company, based in Mauritius, at a premium of Rs 23 in lieu of its total dividend of Rs 937,505 payable to the investor for its preference shares in the company.
The company had issued compulsorily cumulative preference shares to the investor in 2009, which were also converted into equity shares.
In the deliberations on the issue, the Department of Financial Services in the ministry of finance conveyed to the FIPB that the matter had been examined in consultation with the Reserve Bank of India and both were of the opinion it should be permitted.
However, the department of revenue, also a part of the ministry of finance, opined that the grant of approval for the issuance of equity shares in lieu of dividends should be examined by the DIPP and the Department of Economic Affairs.
The revenue department, however, had objections to the specific proposal on the ground that investment into India was being routed through Mauritius to take advantage of the India-Mauritius DTAC, making it a clear case of treaty shopping.
However, the board in its final decision said the objection of the revenue department was general in nature and could be overruled. Clearance to the change in policy was then granted.