Share Allotment to Foreigners under FEMA/ Companies Act

Foreign Exchange Management Act, 1999 (FEMA) came to force by parliament approval enacted on 29th December 1999. This act complies the accords of WHO and acted as a building block for Money Laundering Act, 2002. FEMA is a set of regulation which is powered and governed by RBI to pitch in foreign investment and foreign trade in India. FDI is allowed to be made in – Indian Companies, Firm or Proprietary Concern by NRI or PIO no engaged in agriculture, plantation, real estate or Print media, Indian venture capital fund, LLP.

Table of Content:

Applicability and Objective of the Act

  • Extends to all part of India.
  • Applicable towards all branches, offices, agencies situated outside India either owned or controlled by person in or outside India.
  • Applicable toward any person who has their residential status situated outside India.
  • It helps in facilitating external trade and raising payments.
  • To develop and maintain of foreign market in India.

Note – foreign contribution cannot be accepted by political parties and other person and organization mentioned U/s 3 O=of Act.

FEMA replaced FERA

FEMA replaced FERA (Foreign Exchange Regulation Act 1973. FERA was introduced when FOREX was in emergence.

Came to force on December 29th 1999 Came to force on January 1st 1974.
Inclusion of “Authorized Person” with widened explanation. Inclusive of “Banking Units” incorporated offshore. Confined explanation for Authorized Person.
Confines the section to 49. Covered with essentials in 81 provisions.
Offences are classified as “Civil Offence” Offences are classified as “Criminal Offence.”
Manages foreign exchange. Preserves foreign exchange.
Inclusive of “Capital/ Current Account Transaction” as capital accounts. No provision in regards to Capital Accounts.
EXIM has been defined as per “Customs Act” No separate EXIM policies.
Definition of person as a resident fulfills the condition as mentioned in “Income Tax Act, 1961.” Section 2(p) defines Person.
Separate Tribunals to trial FEMA cases. Jurisdictional High Court is where the cases trialed.
Everything other than covered in the Act is not controlled by FEMA. Everything specified was controlled by the Act.

Foreign currency and Exchange

  • Foreign currency involves every currency apart from INR.
  • Foreign exchange includes deposits, outstanding balances, letter of credit, bill of exchange drawn in Indian Currency but payable in foreign exchange etc.

Foreign Direct Investment  

FDI means any investment made by non-resident entity or an individual person residing outside India in the form of Capital, Purchase of Shares, and Convertible Debentures of any Indian Company (Pakistan and Bangladesh are excluded in making FDI, exempting those who can avail prior approval of FIPB). There are two ways to procure shares in India by foreigners –

  • Automatic Route
  • Government Route
Description Automatic Route Government Route
Meaning When an investment is allowed without any prior approval either by Government of RBI under consolidated FDI policy. Approval of the Government or RBI is mandatory to make an investment.
Procedure Investor has to notify the regional office involved with RBI within 30 days of receipt of inward remittance that’s issue of shares of foreign investors. Application to be made in FORM FC – IL

Investment made on reparation and non-repartition basis

NRI may invest without limitation in

  • Information technology – 49%
  • Banking – 49%
  • Broadband Sector – 74%
  • Infrastructure – 10% Of India’s GDP is based on Construction activities.
  • Electronic system design and manufacturing – 100%
  • Automotive – 49%
  • Mutual funds
  • Shares/ Convertible Debentures under FDI scheme as specified in Schedule 1 of FEMA.

Though the FDI allows investment in varied areas it prohibits investment in areas such as –

  • Small saving
  • Public provident fund
  • Atomic energy
  • Lottery
  • Gambling and betting
  • Real estate
  • Business of chit fund etc.

Mode of investment under FDI

  • Issue of fresh share
  • Issue of fresh debentures
  • Acquisition of shares by transfer (from existing share holder in a way of transfer)
  • Issues of bonus shares
  • Issues made under Employees Stock Option Scheme
  • Conversion of external commercial borrowing (ECB) or import of capitl goods by SEZ into equity
  • Acquisition of shares during merger or amalgamations
  • Issues made under American Depository Receipts (ADR) or Global Depository Receipts (GDR).

Fixation of price of shares in FDI

When any fresh issue of shares is made the issue price shall not be less than that of the price applicable to transfer of share from resident to non-resident.

  • Listed companies – SEBI is delighted for fixation of price of shares. (Section 2)
  • Unlisted companies – gets their share price fixed either by Merchant Bank i.e. registered with SEBI or by a Charted Accountant.
  • SEZ – valuations are carried by development commissioner or customs officials.

Inflow Report

Section 18(i)(a) of Foreign Investment in India (Schematic Representation)– It is mandatory for an Indian company which have received FDI or made FDI abroad to file Foreign Liability and Assets (FLA) to RBI not later than 30 days from date of receipt.

Section 18(i)(b) of Foreign Investment in India (Schematic Representation)– a detailed report in regards of the receipt of the amount of consideration for issue of shares/ convertible debentures together with copies of receipt evidencing the remittance along with KYC report. The report would be acknowledged by the regional office which will later allot an Unique Identification Number.

Section 18(ii) of Foreign Investment in India (Schematic Representation)

Regulation in regards with issue of shares – the shares has to be issued within 180 days by payment of inward remittance or by debit to NRE/FCNR. In non delivery of shares within 180 days from date of inward remittance a refund to be initiated immediately through normal banking channel or by crediting in NRE/FCNR. Failing to comply the conditions in issuance of share or refunding the amount in non failure shall be subjected to penal action from FEMA.

Note – RBI relaxes 180 days duration on merits of the cases.

Section 17 – Issue of Shares under ESOP (Employees Stock Option)

Listed companies/ unlisted companies are eligible for allotting shares under ESOP to its employees or employees of joint venture/ wholly owned by foreign subsidy company whereas, an unlisted company has o follow the procedure of the companies Act, 1956.

Any issuing company has to file a report to the regional office concerning the issues made within 30 of days of such issue.

Regulating factors on Investments made by NRI

NRI can purchase and sell shares of Indian company but subjected to following conditions –

  • Purchase or sale are ought to be made with by a registered broker on recognized stock exchange.
  • Paid up value of equity shares or convertible debentures shouldn’t exceed 5% of total paid up equity capital.
  • Paid up value of equity shares and convertible debentures purchased by NRI’S shouldn’t exceed 10% of total paid up capital whereas the limit of such can are subject to escalate with the approval of the share holders of the company.

Acquisition of right shares and bonus shares

Acquisition – Foreign investors can invest into Indian companies acquiring existing shares from Indian shareholder or from other NRI shareholder where RBI has granted permission for following transaction such as –

  • Non-resident can transfer their share in the way of sale/ gift.
  • Non-resident can transfer their share in the way of transfer (pricing to be observed).
  • A resident of India can transfer their share to a NRI other than companies in financial sector.
Acquisition of Right Shares/ Convertible Debentures Acquisition of Bonus Shares
The acquisition should not increase the percentage of FDI limit. The offer price should be the same as offer made to the residence. The issues made have to be complied with the procedure and form FC GRP has to be filed with RBI in 30 days after such issues. Shares against which bonus shares are issued by the Indian company were acquired by shareholders in accordance with provision of Act. The shares and debentures that are issued to a person become accorded to the restrictions that are applicable to original shares.

Depository – 

American Depository Receipt Global Depository Receipt
Depository receipt issued in American Market is known as ADR. Depository receipt issued anywhere apart from American Market is known as GDR.
  • Both the receipt is “Negotiable Security”.
  • A company can issue ADR/ GDR, if a person is eligible under FDI scheme.
  • After the issue and quarterly return of the respective company has to be filed “Return in Form DR”.
  • Unlisted companies with which SEBI has signed bilateral agreements and can list on foreign exchanges such as IOSCO/ FATF and comply with instructions on downstream investment of RBI.
  • ADR/ GDR follow the FDI regulations.


FDI has become an integral part of national development. The inflow has contributed an effective overall growth of the economy in recent times and the nation have benefited the economy in terms of investments thorough capital, technology, job creations etc. FDI is not only an alternative way of investment and generates employment in globalized world. With a strong inflow of FDI the nation’s balance will improve in terms of money and strengthens the value of INR against global currencies.


CA Rohit Goyal has experience in multiple spheres including general functions in the field of Auditing, Accounting, and handling Scrutiny Assessments, Taxation Matters along with the specialized functions including Finance, Banking and also handles the field of Stock Audit, Internal Audit and other Various Assignments of Banks.

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