The Department for Promotion of Industry and Internal Trade ("DPIIT"), on April 7, 2025, issued Press Note No. 2 (2025 Series) ("PN 2") providing clarification in relation to the issuance of bonus shares to existing non-resident shareholders of Indian companies, in cases where the Indian companies are engaged in sectors where foreign direct investment ("FDI") is prohibited.
As per the provisions of current Indian foreign exchange control regulations, there are certain business sectors where foreign investment is prohibited, including the lottery business, gambling and betting, chit funds, real estate business, nidhi companies, the manufacturing of cigars, cigarettes, tobacco or tobacco substitutes.
Under Indian foreign exchange control laws, Indian companies can issue bonus shares to existing non-resident shareholders subject to compliance with applicable laws and sectoral caps. The provisions of PN 2 clarifies this position, stating that Indian companies which are engaged in business sectors where FDI is prohibited, can indeed issue bonus shares to their pre-existing non-resident shareholders. However, any such Indian company needs to ensure that: (i) pursuant to such bonus issuance, the shareholding pattern of the pre-existing non-resident shareholders does not change; and (ii) the bonus shares being issued comply with the applicable rules and regulations.
The issuance of PN 2 by DPIIT is a welcome move and clarifies the position on issuing bonus shares to Indian companies engaged in FDI prohibited sectors. It is worth noting that this clarification does not, however, entitle a foreign investor to bring in further funds into, or invest in an Indian company, which is carrying on business activities in a sector where FDI is prohibited.
The provisions of PN 2 are expected to be incorporated and notified soon in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
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