Regulatory framework of issue of securities to foreigners

Securities to Foreigners

India offers the world lower corporate taxes and skilled labour. Therefore, companies across the world make their investments in India. One of the most sought after modes of investment in India is through Foreign Direct Investment (FDI). The economic liberalization process initiated since 1991 has increased inflow of FDI. This piece of writing covers the process of issuance of securities to foreigners and foreign entities for making investment in Indian companies in the form of shares and other securities.

What is the regulatory framework for issuing securities to foreigners and foreign entities?

The following laws are applicable to the issue of securities to foreigners and foreign entities:

  1. Foreign Exchange Management Act, 1999[1] read with Foreign Exchange Management (Non-Debt Instrument) Rules, 2019
  2. Companies Act, 2013
  3. Income Tax Act, 1961      

What are modes of issuing shares to foreigners and foreign companies?

A company adopts the following two modes for issuing securities to foreigners and foreign companies under the provisions of Companies Act, 2013:

  1. Rights issue under section 62(1)(a)
  2. Preferential issue under section 62(1)(c) read with Private Placement under section 42

Guidelines on pricing 

The person valuing the shares and securities needs to be extra cautious at the time of issuing of shares and securities to foreigners since the task of issue of issue of securities to foreigners involves transferring of assets and foreign currency. This process needs to be in compliance with the provisions of FEMA, FEMA (Non-debt instrument) Rules Companies Act, Income Tax Act along with their respective rules.

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FEMA, FEMA (Non-debt instrument) Rules

Under the FEMA (Non-debt instrument) Rules, it is stated that the price of the Capital Instruments of an Indian Company cannot be evaluated less than the Fair Market Value (FMV). This calculation is done on the basis of internationally accepted pricing methodology for valuation on arm’s length basis. This valuation is carried out by a duly certified CA or a SEBI registered Merchant Banker or a practicing Cost Accountant.

It must be noted that FEMA does not prescribe any internally accepted pricing methodology. Some of the internationally accepted methodologies adopted internationally for valuation purposes include Discounted Flow (DCF) Method, Comparable Transactions Method, Net Asset Value (NAV) method, Comparable Transactions method etc.

The Companies Act, 2013

According to the provisions of the Companies Act, only a valuer registered with the IBBI has been authorised for valuations of shares and securities issued under preferential issue and private placement. Therefore, if a company is issuing shares and securities under private placement, then an additional valuation report will be prepared for the submitting to the ROC.

The Income Tax Act, 1961

The Income Tax Act only permits a SEBI registered Merchant Banker for valuation of shares if the method adopted is DCF or NAV whereas a Chartered Accountant has been permitted valuation of shares if the method adopted is NAV method. The Income Tax Act bar the Chartered Accountants from issuing valuation report if DCF method is adopted.


From the above discussion, it can be observed that different statutes prescribe different kinds of valuation. The government has made efforts to formalize the profession of valuation of shares by introducing the provision of registered valuer under Companies Act, 2013. Because of this step there is no dearth of registered valuers in India for financial and securities assets. Moving forward, the government should make amendments to introduce the provision of registered valuer in the Income Tax Act and FEMA. This will bring ease of doing business for the companies where they will need only one valuation certificate for one transaction.

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How should a company receive payment for issuing shares under FDI ?

An Indian company who issues shares under FDI should receive the share subscription money through any of the following two methods:

  1. As inward remittance using normal banking channels
  2. The money can be debited to FCNR(B)/ Escrow/ NRE Account which is maintained with an Authorized Dealer Bank in India

It must be noted that if the Indian company fails to issue the capital instruments to either foreigners or foreign companies within a period of 60 days from the date of receipt of funds, then the company is bound to refund the money received within a period of 15 days from the date of completion of 60 days through the same banking channels through which the funds were received.

Guidelines for Reporting

The reporting for issuing of shares and securities to foreigners or foreign companies by an Indian Company is done in a single form of FC-GPR. It reports about the remittance and allotment. The Reserve Bank of India has simplified the cumbersome procedure of FDI reporting for the Indian entities by consolidating multiple forms into a single master form called as Single Master Form (SMF) which is found on the Foreign Investment Reporting and Management System (FIRMS) portal.  The entity needs to fill only a single form FC-GPR after allotment is done within a period of 30 days from the date of issuance of shares.

The form requires for certain specific details such details of the investee company, percentage of FDI which is allowed by the FDI policy, main business for which the investment is being made, the date of issue of shares, route adopted for investment, details of foreign investors, type of securities issued.

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Documents to be attached

The following documents need to be attached with the master form:

  • Certificate from practicing Company Secretary certifying that proper compliance of FEMA rules has been done
  • Certificate of Foreign Inward Remittance
  • KYC of Investor
  • Board Resolution, the list of allottees and other required secretarial documents for the allotment of shares
  • Share Valuation certificate by a certified Chartered Accountant or Cost Accountant or a Merchant Banker for the shares issued to the foreign investor     


Issuance of securities to foreigners and foreign securities is a complicated process which requires a host of documents, valuation and reporting from a professional recognised by law and also requires compliance of multiple laws. Therefore, it must be done with care and caution or it will attract hefty penalties and unnecessary litigation. Therefore, the companies must take the help of professionals for smooth process of filing procedure.

Read our Article:Curious case of FEMA violations by RR (Rajasthan Royals)

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