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Representation
Bombay Chartered Accountants’ Society
Discussion Paper issued by DIPP on
‘ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH’
Representation by
BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY
1. Background :
1.1 FEMA classifies transactions into two kinds — Current
Account Transactions and Capital Account Transactions.
1.2 Issue of shares by an Indian company to a non-resident is
classified as a Capital Account Transaction.
1.3 At present, FEMA permits non-cash consideration for issue
of shares by way of :
(i) a permissible Current Account Transaction (e.g., in
lieu of ‘royalty’); or
(ii) a permissible Capital Account Transaction (e.g.,
conversion of shares/securities, ECB, etc.).
2. Non-cash consideration — need of the
hour :
2.1 Two-way cash remittances involve the following financial
and non-financial costs :
v Transaction charges levied by the bank.
v With increased volatility in exchange rates, hedging costs are required to
be borne to mitigate the exchange fluctuation risk.
v Opportunity cost and
period cost arising from time delay in two-way remittance of the same
amount.
2.2 Hence, non-cash consideration is the need of the hour.
3. Premise of Representation :
This representation is based on the following premise.
3.1 No discrimination :
No discrimination should arise merely because the shares are
issued for non-cash consideration.
For instance, generally, a Current Account Transaction is not
required to be valued. Hence, such requirement should not be stipulated merely
because shares are issued for non-cash consideration.
3.2 Intangibles/Extraordinary Payments :
Proper valuation of intangibles/extraordinary payments may
pose substantial challenge, particularly at the regulatory end. Hence, non-cash
consideration by way of intangibles/extraordinary payments may be deferred till
acceptable norms for valuation of intangibles/extraordinary payments are
evolved.
3.3 Checks and Balances :
Proper system of adequate checks and balances should be
instituted to ensure against misuse. The system should ensure that where :
v income tax, customs duty, R & D Cess, etc. are payable, they are duly paid
before the shares are issued; and
v KYC norms or any such
compliances that are required to be done to protect against money laundering
possibilities, are properly done and supervised/recorded by the relevant
regulatory authorise.
4. Representation on Issues posed by DIPP :
4.1 S. 4.1(a) :
Does the issue of shares for considerations other than cash
represent a valid and unaddressed business need ? Should the Government amend
the FDI policy to address this need ? Will adoption of such an approach dilute
the objective of FDI policy by decelerating the flow of physical capital into
the country ?
Issue of shares for non-cash consideration is a business need
particularly because two-way cash remittances involve avoidable transaction
costs. Hence, FDI policy may be appropriately amended.
The objective of FDI policy should be to encourage
investments but not necessarily only by inflow of physical capital. The total
FDI can always be ascertained with proper reporting mechanism and adequate
checks and balances.
4.2 S. 4.1(b) :
Should the Government consider categories not covered under
extant policy for the issue of shares against considerations other than cash ?
Should such consideration be limited to the cases mentioned in S. 3 above or
should other categories also be added ? What regulatory safeguards should be
prescribed for each such case/category ?
To begin with, the categories mentioned in S. 3 should be
considered, and based on the experience as well as the perceived need, other
categories may be added.
The regulatory safeguard should ensure that the statutory
obligations (income tax, customs duty, R & D Cess, etc.) are fulfilled.
4.3 S. 4.1(c) :
Where allotment of shares for considerations other than cash
is permitted, should the Government be concerned with the valuation of shares ?
Should objective valuation of services/goods received as consideration for the
issue of shares be the prime concern in such cases and should it form the basis
for amendments to the FDI policy ? What are the guidelines that should be
adopted for listed/non-listed companies in such cases ? Can concerns relating to
valuation be effectively addressed elsewhere ?
Valuation norms as regards the shares should be the same,
irrespective of whether the shares are being issued for cash consideration or
for non-cash consideration.
Objective valuation of services/goods should be the concern
of the regulatory authority that normally deals with it. For instance, valuation
of imported goods is dealt with by Customs. Hence, that should be the authority
and FDI policy should provide for reliance on the valuation accepted by Customs.
As regards services, presently, no valuation norms are stipulated for
remittance. Hence, similarly, in case of issue of shares in lieu of services, no
norms for valuation of services should be applied.
Similarly, valuation norms for shares should be uniformly
followed, irrespective of whether the shares are issued for cash consideration
or for non-cash consideration.
4.4 S. 4.1(d) :
Should issue of shares to set off payment in the current
account/intangibles/one-time extraordinary payments be permitted ? Should the
broad
principle be adopted that whenever money has been received in India or value has
been received in India in lieu of money and valuation protocols are in place,
issue of shares may be permitted, with prior Government approval ?
As proper valuation of intangibles/extraordinary payments could pose challenge, non-cash consideration by way of intangibles/extraordinary payments may be deferred till acceptable norms for valuation of intangibles/extraordinary payments are evolved.
4.5 S. 4.1(e):
Is there a possibility that the issue of shares for non-cash considerations listed in S. 3 above could be misused, especially in the context of money laundering? If so, what steps should be taken to address such a contingency?
Proper system of adequate checks and balances should be instituted to ensure that where:
- income tax, customs duty, R & D Cess, etc. are payable, they are duly paid before the shares are issued; and
- KYC norms or any such compliances are required to be done to protect against money laundering possibilities, these are properly done and supervised/recorded by the relevant regulatory authorise.
