India: RBI Reviewed Guidelines For Issue Of Shares/ Convertible Debentures Under Automatic Route

Reserve Bank of India (RBI) vide A.P. (DIR Series) Circular No.31 dated September 17, 2014 has reviewed the Guidelines for issue of shares/ convertible debentures under the automatic route.

As per the existing provisions, an Indian company under the automatic route may issue shares/convertible debentures to a person resident outside India against lump-sum technical know-how fee, royalty External Commercial Borrowings (ECBs) (other than import dues deemed as ECB or Trade Credit as per RBI guidelines) and import payables of capital goods by units in Special Economic Zones subject to certain conditions like entry route, sectoral cap, pricing guidelines and compliance with the applicable tax laws.

Upon review of the said Guidelines, it has been decided by RBI to permit issue of equity shares against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA, 1999 or any rules/ regulations framed or directions issued thereunder, provided that:

i. The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc. as amended by Reserve bank of India, from time to time;

Explanation: Issue of shares/convertible debentures that require Government approval in terms of paragraph 3 of Schedule 1 of FEMA 20 or import dues deemed as ECB or trade credit or payable against import of second hand machinery shall continue to be dealt in accordance with extant guidelines;

ii. The issue of equity shares under this provision shall be subject to tax laws as applicable to the funds payable and the conversion to equity should be net of applicable taxes.

RBI in its circular has further clarified that all the other conditions with respect to issuance of equity shares under the automatic route and Government approval route shall remain unchanged.

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