In an effort to check large-scale money laundering and violation of existing norms, the government is planning to change the foreign direct investment (FDI) norms relating to domestic companies issuing shares to foreign companies for consideration other than cash.
In a discussion paper released by the Department of Industrial Policy and Promotion (Dipp), the government has sought opinion on whether there is a possibility of issue of shares for non-cash considerations being misused, especially in the context of money laundering.
“The FIPB Review, 2009, observed that issues of shares, for other than cash considerations, require a much deeper look and, with the increasing numbers of such cases, some objective norms would have to be evolved soon. The review further observed that, though the board has been, by and large, liberal in facilitating the industry, this route for FDI cannot be allowed to become a norm, since the purpose of FDI gets defeated through this mode,” Dipp said in the paper.
The proposed guidelines will also cover share swaps, which take place in mergers and acquisitions. An increasing number of Indian companies are expanding their operations in overseas markets.
The department has also said that many companies are spreading their operations to overseas markets, however, in doing so the companies are required to comply with overseas direct investment regulations. Thus such companies often resort to share-swap transactions. Thus, Dipp has suggested that share swaps could continue to be permitted through the government route, subject to certain conditions.
The discussion paper also deals with issues of shares against intangible assets. It said, since there were no particular criteria for evaluating the intangibles, such instances led to excess shares.
“Since such cases may pose significant challenges in terms of valuation, and would require evolution of detailed guidelines, the balance of convenience may lie in not considering such cases at present,” it said.
Under the present policy, shares can be issued to a non-resident against receipt of funds through normal banking channels. However, Indian companies, at times, are given permission for conversion of external commercial borrowings (ECBs) into shares and preference shares subject to FDI and Sebi regulations.