A crucial condition for such issuances is that the shareholding percentage of the non-resident shareholders must remain unchanged
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The Finance Ministry has issued a much-needed clarification regarding issuance of bonus shares to non-resident shareholders by companies operating in sectors prohibited for Foreign Direct Investment (FDI). This amendment to the Foreign Exchange Management (Non-debt Instruments) Rules not only provides much-needed clarity for future issuances but also retrospectively validates bonus shares issued in the past, deeming them compliant with regulations. This move is expected to particularly benefit companies in the tobacco sector, among others.
The official notification said: “An Indian company, engaged in a sector or activity prohibited for foreign direct investment, may issue bonus shares to its pre-existing shareholders who are persons resident outside India, provided that the shareholding pattern of such shareholders is not changed pursuant to the issuance of bonus shares and any bonus shares issued to such shareholders prior to the date of commencement of this sub-rule shall be deemed to have been issued in accordance with the provisions of these rules…”
operational flexibility
Effective June 11, the date of its publication in the official gazette, this amendment offers operational flexibility to companies in FDI-prohibited sectors, enabling them to reward long-term investors. However, it also necessitates careful planning and strict adherence to regulatory requirements to avoid compliance issues.
The notification builds upon Press Note Number 2 of 2025, which had already permitted Indian companies in FDI-prohibited sectors— such as lottery, gambling, betting, chit funds, real estate, and the manufacturing of cigars and cigarettes — to issue bonus shares to pre-existing non-resident shareholders. A crucial condition for such issuances is that the shareholding percentage of the non-resident shareholders must remain unchanged. The latest amendment addresses ambiguities that remained after the issuance of Press Note 2.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP, highlighted that this clarification likely stems from Godfrey Phillips India’s recent request to issue bonus shares to its non-resident shareholder, Philip Morris Global Brands Inc., despite operating in an FDI-regulated industry. As bonus shares do not lead to an additional FDI inflow and provided existing foreign ownership remains constant, such issuances were generally considered permissible under the automatic route.
A key ambiguity is the retrospective application of the clarification provided by Press Note 2 on April 7, 2025. Jhunjhunwala explained, “Typically, changes in FDI policy via press notes are prospective in application. The current FEMA notification, however, dispels such doubts by clearly outlining that bonus issues done in the past would get a retrospective benefit of this clarificatory amendment.”
Xerxes Antia, Partner, Corporate Transaction and Restructuring at BTG Advaya, affirmed that these Amendment Rules clarify earlier restrictions on ‘Restricted Companies’, allowing them greater freedom to undertake bonus issuances. This facilitates restructuring options and enables companies to reward shareholders, provided they adhere to the specified conditions. Antia added, “It also provides comfort to ‘restricted companies’ (and pre-existing non-resident shareholders) on past bonus issues made under earlier exchange control regulations specified under the Amendment Rules.”
Published on June 13, 2025
