The Hindu Business Line : Issue of shares to foreign cos may be allowed against payment made to third party

New Delhi, April 29 Indian companies may soon be permitted to issue equity shares to their foreign parents against payments made by the latter on behalf of it to a third party.

This could be among a slew of measures that the Department of Economic Affairs (DEA) is examining to speed up the implementation of various approved foreign investment proposals.

As of now, this amount is shown as loan from parent in the company’s books and usually bears a nominal rate of interest. The move will also mark a shift from the present policy of allowing issue of shares instead of paying cash only in case of three specific types of transactions that would have otherwise required cash transfer from the subsidiary to the parent company.

Policy terms

Under the current policy, an Indian company can issue equity shares to a foreign company if the latter is entitled to receive a lump-sum fee, which may be for use of brand name or logo or according to the agreement. The second category is where the Indian company is liable to pay royalty to the foreign company for technological collaboration.

Shares can also be issued to retire external commercial borrowings by converting loans into equity. In case an Indian company wants to issue shares to a foreign company against payments made by the latter to a third party on behalf of it, the present policy calls for prior approval from the Foreign Investment Promotion Board (FIPB) which takes a decision on a case-by-case basis.

Case study

According to sources, a typical case could be acquisition of land for setting up facilities. A foreign company applies for land in an industrial estate and can simultaneously begin the process of incorporating the Indian subsidiary. The Indian company, on incorporation, would be able to issue shares to the parent against the advance payment made by it before the subsidiary came into existence. Payments made by the parent company on behalf of the subsidiary for meeting regulatory and statutory requirements may also be considered for such automatic conversion into equity shares by the Department of Economic Affairs shortly, sources said.

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