FDI Rule Eased: Govt Allows Bonus Shares to Existing Foreign Investors in Prohibited Sectors

The Indian government has allowed companies operating in sectors where foreign direct investment (FDI) is prohibited to issue bonus shares to existing foreign shareholders, provided there is no change in the shareholding pattern post-issuance.

This move, announced by the Department for Promotion of Industry and Internal Trade (DPIIT), aims to clarify and facilitate operations for companies operating in such sectors.

According to DPIIT, the issuance of bonus shares must comply with all applicable rules, laws, regulations, and guidelines. “An Indian company engaged in a sector/activity prohibited for FDI 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 under the issuance of bonus shares,” the department said in a clarification inserted into the FDI policy.

FDI Framework and Prohibited Sectors

FDI in India is permitted through two main routes: the automatic route and the government approval route. Under the automatic route, investors are only required to inform the Reserve Bank of India (RBI) post-investment. In contrast, the government route mandates prior approval from the relevant ministry or department.

While FDI is allowed in most sectors under the automatic route, some sectors like telecom, media, pharmaceuticals, and insurance require government clearance. However, in certain sensitive areas, foreign investment is completely banned.

These prohibited sectors include the lottery business, gambling and betting, chit funds, nidhi companies, real estate business (excluding construction development), and the manufacturing of cigars, cheroots, cigarillos, and cigarettes containing tobacco.

FDI plays a crucial role in India’s economic growth, particularly in infrastructure development. It also supports balance of payments stability and helps in maintaining the rupee’s value.

Conclusion 

In conclusion, the DPIIT’s clarification marks a significant regulatory relief for companies in FDI-prohibited sectors, enabling them to issue bonus shares without altering foreign shareholding.

This move not only ensures compliance and shareholder parity but also boosts investor confidence by simplifying corporate procedures and affirming the validity of past actions taken under similar circumstances.

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