The Indian government has relaxed rules regarding foreign direct investment (FDI) in sectors where it is otherwise prohibited, offering relief to companies like ITC Ltd. According to a clarification issued by the Department for Promotion of Industry and Internal Trade (DPIIT), Indian firms operating in prohibited sectors may now issue bonus shares to their existing foreign shareholders, as long as the shareholding pattern remains unchanged post-issuance.
Bonus Shares Now Permitted for Existing Foreign Investors
The new clarification makes it clear that bonus issuances, which do not involve inflow of foreign capital, can be used as a legitimate mechanism to reward shareholders. The move is particularly beneficial to ITC Ltd, in which British American Tobacco PLC (BAT) currently holds a 25.5% stake. BAT can now be issued bonus shares, provided its overall shareholding in the company remains within the permitted equity cap.
“This clarification will allow such Indian companies to effectively capitalise their existing reserves and provide another avenue for cash distribution to their existing shareholders – both foreign and Indian,” said Vaibhav Kakkar, Senior Partner at Saraf and Partners.
Applicable Only to Pre-Existing Shareholders
The DPIIT has specified that only non-resident shareholders who already hold equity in the company can receive such bonus shares. The ruling excludes new foreign investment in these sectors, maintaining the integrity of the original restrictions.
“Sectors such as tobacco, lottery, gambling, betting, chit funds, real estate (excluding construction of farmhouses), atomic energy, and railway operations remain prohibited for fresh FDI,” the clarification said.
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Boost to Legacy Foreign Shareholding in Restricted Sectors
Companies operating in these sectors had previously faced procedural delays when trying to issue bonus shares to foreign shareholders. For example, Godfrey Phillips India Limited had to seek prior clarification from the Reserve Bank of India (RBI) to move ahead with such corporate actions.
“This change will significantly streamline corporate actions for companies with existing FDI in restricted sectors, such as tobacco industry, ensuring parity in shareholder rights and improving investor confidence,” said Rudra Kumar Pandey, Partner at Shardul Amarchand Mangaldas & Co.
The move is expected to smoothen governance processes and strengthen investor sentiment for firms with grandfathered FDI in currently restricted sectors.
