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Procedures for increase in Foreign Equity to 51 per cent in existing companies. This section states the procedures to be followed for increase in foreign equity in existing companies which already have some foreign equity holdings. A. Eligibility Criteria for increase in Foreign equity. The following categories of companies will receive automatic approval from the Reserve Bank of India for raising their foreign equity levels from existing levels upto 51%. i) Companies wishing to raise foreign equity as part of an expansion programme. A company wishing to raise its foreign equity from existing levels to 51 % may do so as part of an expansion programme. The expansion programme must be in high priority industries shown in Annex III to the statement on Industrial policy. The additional equity should be part of the financ- ing of the expansion programme and the money be remitted should be in foreign exchange. The company itself need not be exclusively engaged in activities listed in Annex III; only the proposed expansion must be exclusively in the high priority industries shown in Annex III. ii) Companies wishing to raise level of foreign equity upto 51% without an expansion programme. A company exclusively engaged in high priority indus- tries listed in Annex III can also raise its equity from existing levels to 51 per cent without an expansion pro- gramme. The increase in equity level must result from expan- sion of the equity base of the existing company. The addi- tional foreign equity must be from remittance of foreign exchange. B. Requirement for Preferential Share Allocation. On receipt of RBI approval the company must pass a special resolution under Section 81 (1A) of the Companies Act proposing preferential allocation of the required volume of fresh equity to the foreign investor. In respect of the equity holdings of financial institutions in such companies, the Finance Ministry will separately advise the financial institutions that they may support such proposals provided in their commercial judgment, they are in the interest of the company. C. Issue of share and share Valuation Companies wishing to enhance their foreign share holding upto 51% as per the procedures outlined above will be able to make issues at the price determined by the shareholders in a special resolution under section 81(1)(A) of the Companies Act. This will apply mutatis mutandis to closely held companies. This will also apply to companies where there is no foreign share holding at present. D. Procedures for approvals Applications for approval under the provision in para 6 above will be filed with the Reserve Bank of India. In the case of expansion programme the application shall state clearly the description of the article to be manufacture in ITC (HS classification). The proposal shall be a composite one including details information on the goods to be imported for the project expansion programme. Under the provision of the policy the proposed foreign equity must cover the import of capital goods required for the expansion programme. Similarly, in the case of companies not undertaking expansion programme, the application shall describe the existing products of the company in ITC (HS classification). The Reserve Bank of India will issue the necessary permission for the foreign equity investment under the For- eign Exchange Regulation Act, 1973 (FERA). This permission will include exemption from the operation of sections 26(7), 28, 29, and 31 of FERA. Simultaneously the Reserve Bank of India will confirm that the import of capital goods is cov- ered by the foreign equity Based on this confirmation the Chief Controller of Imports & Exports shall issue the rele- vant import licence for capital goods imports. Under the procedure outlined above the plant and ma- chinery proposed to be imported must be new and not second hand. There will be no indigenous clearance of these capital goods. E. Dividend Balancing Para 39 B (ii) of the Policy Statement provides for the monitoring of outflow of foreign exchange on account of dividend payments which are to be balanced by export earning over a period of time. This monitoring will be done by the Reserve Bank of India. The balancing will be done on the following basis. (i) The condition of dividend balancing is required for all companies receiving approval for foreign equity upto 51% under the provisions outlined above in para 6. (ii) The balancing of dividend would be over a period of years reckoned from the data of commencement of production for companies raising their level of foreign equity for an expansion programme. For companies which are raising their foreign equity levels without an expansion programme. This period will start from the date of allotment of the shares raising the level of foreign equity to the newly approved level. (iii) Remittance of dividends should be covered by earnings of the company from export of items in Annex-III. The amount of dividend payment may covered by export earnings of such items recorded in years prior to the payment of dividend or in the year of payment of dividend. The Reserve Bank of India will issue appropriate instructions to give effect to these provisions. F. OTHER PROPOSALS FOR RAISING LEVEL OF FOREIGN IN EXISTING COMPANIES All other foreign proposals, for raising of foreign equity levels in existing companies will be subject to usual procedures. Applications will be made to the Secretariate of Industrial approvals in the Department of Industrial Develop- ment in the prescribed form. This will include proposals involving increase in foreign equity upto 51% which do not meet any or all of the criteria outlined above. G. Classification System Entrepreneurs may note that the description of arti- cle(s) to be manufactured should be stated according to the Indian trade Classification (Harmonised System) The description of industries covered by Annex III of the Statement on Industrial Policy in the Indian Trade Clas- sification (Harmonised System) is available in Press Notes No. 11 (1991 Series) (Copies of the India Trade Classifica- tion (Based on Harmonised Commodities Description and Coding System), published by the Ministry of Commerce, Directorate General of Commercial intelligence and statistics, Calcutta, can be obtained on payment from the controller of publica- tions, 1, Civil Lines, Delhi -110 054 or from any of the agents authorised to sell Government of India publications). N.B.: UPDATED ON JUNE 1, 1992.
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