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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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