Govt Clarifies Rules On Issuing Bonus Shares To Foreign Investors

The government has clarified that an Indian company operating in a sector where Foreign Direct Investment (FDI) is prohibited can issue bonus shares to its existing foreign shareholders, as long as there is no change in the shareholding structure. The Department for Promotion of Industry and Internal Trade (DPIIT) stated that the issuance of bonus shares must adhere to all relevant rules, laws, regulations, and guidelines.

"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.

The government has clarified that this guidance pertains to the permissibility of issuing bonus shares to existing foreign shareholders by Indian companies operating in sectors where FDI is prohibited.

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FDI Flow

While FDI is allowed through the automatic route in most sectors, areas like telecom, media, pharmaceuticals, and insurance require government approval for foreign investments. Additionally, FDI is entirely banned in certain sensitive sectors.

Under the government approval route, foreign investors must obtain prior clearance from the relevant ministry or department. In contrast, the automatic route only requires investors to notify the Reserve Bank of India (RBI) after making the investment.

Currently, FDI is prohibited in sectors such as lottery, gambling and betting, chit funds, nidhi companies, real estate business, and the manufacturing of cigars, cheroots, cigarillos, and cigarettes using tobacco.

FDI plays a crucial role in India’s economic growth, as the country will need substantial investments in infrastructure in the coming years. Strong foreign inflows also support the balance of payments and help stabilise the value of the rupee.

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