Regulatory Framework of Issue of Shares and Securities to Foreigners

Foreign Investment Policy regulates direct foreign investment in a country’s production or business by a person or firm from another country. For developing countries like India, foreign direct investment (FDI) is an essential source of finances. These investments represent a significant non-debt financial resource for the country’s economic development. The process of foreign investment in India is governed by the Foreign Direct Investment of the Government of India and the Foreign Exchange Management Act, a regulatory mechanism established in 1999 that allows the RBI to enforce restrictions and the Central Government to enforce rules concerning foreign exchange in compliance with India’s Foreign Trade Policy. So, here in this blog, our team of Legal Window will guide you about Regulating the Framework of the Issue of Shares.

What do you mean by Foreign Direct Investment (FDI)?

An investment in the form of controlling ownership in a business in one country by an entity based in another country is known as a Foreign Direct Investment (FDI).  It differs from a Foreign Portfolio Investment (FPI), in which investors hold securities from a foreign country in a passive manner. Obtaining a long-term interest or extending one’s firm into a foreign country are both examples of foreign direct investment.

What is the difference between FDI and FPI?

• Securities and other financial assets held by investors in another nation reffer to as foreign portfolio investment (FPI). It does not provide the investor actual ownership of a company’s assets and, depending on market volatility, is relatively liquid. FPI is one of the most frequent ways to participate in an overseas economy, alongside foreign direct investment (FDI). For most economies, FDI and FPI are both important sources of funding.
• Also, a large investment in, or outright acquisition of, a company established in another country is necessary for foreign direct investment (FDI).
• Foreign direct investment (FDI) is a greater investment to help a firm grow.
• Both foreign direct investment (FDI) and foreign direct investment (FDI) are widely welcome, especially in developing countries. FDI, in particular, entails a larger responsibility to comply with the legislation of the country in which the company receiving the investment is located.

The procedure for issuing shares to foreigners or foreign corporations

The procedure for issuing shares to foreigners / foreign corporations is as follows:

As per Section 62(1) (a)

• Call a board meeting to discuss the suitable issuance mode of allotment of shares.
• Send an offer letter to current members and make the offer to them first.
• Allot to them if they accept their right shares.
• If they renounce in favour of someone else, allot to that person.
• If they renounce in favour of someone the board deems appropriate, apportion to whomever the board deems appropriate.
• Submitting an allocation return in the form PAS-3 to the Registrar of Companies.
• Submitting Form FC-GPR to the RBI.

Moreover, a Shareholders’ Meeting is not necessary under the right issue technique because all members will receive an offer letter in proportion to their holdings in the company to subscribe to the issue first. This procedure is quite simple and convenient for tiny unlisted corporations with a small number of shareholders.

As per Preferential Issue under Sections 62(1) (c) and 42

• Call a meeting of the board of directors to review the allotment of shares under the preferential issue and private placement programmes.
• Obtain a valuation report from a licence appraiser.
• Call a General Meeting and have members pass a specific resolution;
• File a special resolution with the Registrar of Companies using form MGT-14.
• Create a separate bank account for subscription payments.
• After submitting a special resolution in MGT-14, issue a Private Placement offer letter in PAS-4.
• Based on the RV valuation evaluation, allot the shares to a third party.
• Submitting an allocation return in the form PAS-3 to the Registrar of Companies.
• Submitting Form FC-GPR to the RBI.

However, this approach necessitates the adoption of a special resolution, the submission of Form MGT-14, and the receipt of a valuation report from a licensed appraiser. This strategy is appropriate for large public trade companies with a large number of owners that want to distribute shares to a small number of carefully chosen investors.

Pricing Guidelines Compliance with FEMA Rules 1999, Income Tax Act, 1961, and Companies Act, 2013

Likewise, as we are transferring assets and foreign currency when offering shares and securities to foreigners or foreign corporations, we must be extra cautious when pricing the instrument. While issuing shares and other securities to foreigners, we must price our instrument in accordance with the FEMA Act and rules, as well as the Income Tax Act and Companies Act, 2013.

FEMA Act, 1999

According to the FEMA (Non-debt instrument) Rules, the price of an Indian company’s capital instruments cannot be less than the Fair Market Value (FMV). This computation is based on an internationally recognized pricing methodology for arm’s length valuation. A duly qualified CA, a SEBI registered Merchant Banker, or a practicing Cost Accountant performs this appraisal.

It is important to remember that FEMA does not have any internal pricing system. Discounted Flow (DCF) Method, Comparable Transactions Method, Net Asset Value (NAV) Method, C, and others are some of the internationally acknowledged approaches used for valuation purposes.

Companies Act, 2013

Only a valuer registered with the IBBI has authorized to value shares and securities issued under preferential issue and private placement, according to the Companies Act, 2013. As a result, if a firm is offering shares and securities through a private placement, a separate valuation report will create for submission to the ROC.

Income Tax Act, 1961

Only a SEBI registered Merchant Banker is permitted to value shares using the DCF or NAV methods, however, a Chartered Accountant is permitted to value shares using the NAV method. If the DCF approach is used, the Income Tax Act, 1961 prohibits Chartered Accountants from providing valuation reports.

Reporting Guidelines

• A single form of FC-GPR use to report an Indian company’s issuing of shares and securities to foreigners or foreign companies. It contains information on remittance and allotment.

• The Reserve Bank of India has made FDI reporting easier for Indian businesses by combining various forms into a single master form known as the Single Master Form (SMF), which accessed on the Foreign Investment Reporting and Management System (FIRMS) portal.
• After allotment is complete, within 30 days of the date of issuing securities, the entity only needs to fill out one form, the FC-GPR.

The form asks for information on the investee company, the percentage of FDI allowed by the FDI policy, the main business for which the investment is being made, the date of the stock issue, the investment route taken, the names of foreign investors, and the type of securities issued.

Necessary Documents which need to be Attached

• Certificate of Inward Remittance from Outside the U.S.
• For the shares issued to the foreign investor, a certificate of share valuation signed by a certified Chartered Accountant, Cost Accountant, or Merchant Banker is necessary.
• A certificate from a practising Company Secretary stating that all FEMA rules should follow.
• Investor’s KYC
• For the allotment of shares, the Board Resolution, the list of allottees, and other appropriate secretarial papers are necessary.

Conclusion

Issuing securities to outsiders could be a rigorous process that requires plenty of documentation, valuation, and announcing from a licensed proficient, as well as adherence to a few laws. As a result, it must do carefully and with help of professionals, or it’ll result in huge fines and superfluous cases. As a result, businesses must enroll the help of experts to guarantee a consistent filing. We the team of Legal Window provide a well knowledgeable team of experts who can help you throughout the process of Regulating the Framework of the Issue of Shares. If you are looking for expert guidance, feel free to contact us.