Rights Issue and Preferential Allotment are two methods used by Indian companies to raise capital from their existing shareholders. These methods are subject to specific regulations under the Foreign Exchange Management Act (FEMA) when there is the involvement of non-resident shareholders or foreign investments.
A Rights Issue is an offer made by a company to its existing shareholders to subscribe to additional shares at a predetermined price. It allows shareholders to maintain their proportionate ownership in the company by subscribing to new shares in proportion to their existing shareholding.
1- Eligibility: Companies issuing a Rights Issue should ensure that non-resident shareholders are eligible to participate as per FEMA regulations. Certain sectors may have restrictions on foreign investment, and the rights issue should comply with the sectoral caps.
2- Pricing Guidelines: The pricing of shares offered in the Rights Issue must comply with FEMA’s pricing guidelines, ensuring that it is not issued at a price lower than the fair market value determined as per the guidelines.
3- Reporting Requirements: Companies must report the Rights Issue to the Reserve Bank of India (RBI) through the authorized dealer (bank) within the prescribed timeline. The reporting should include details of the number of shares offered to non-resident shareholders.
4- Repatriation of Sale Proceeds: If non-resident shareholders do not wish to subscribe to the Rights Issue and want to sell their entitlement, the repatriation of the sale proceeds must be in accordance with FEMA regulations.
Preferential Allotment is the issuance of shares by a company to a select group of investors, which may include promoters, directors, institutional investors, or non-resident investors, at a price determined by the company.
Eligibility: Companies should ensure that non-resident investors are eligible to participate in the Preferential Allotment as per FEMA regulations and sectoral caps.
Pricing Guidelines: The pricing of shares offered in the Preferential Allotment must comply with FEMA’s pricing guidelines.
Reporting Requirements: Companies must report the Preferential Allotment to the RBI through the authorized dealer (bank) within the prescribed timeline. The reporting should include details of the number of shares allotted to non-resident investors.
Compliance with Sectoral Caps: For certain sectors, there may be restrictions on foreign investment. Companies must ensure compliance with sectoral caps while making Preferential Allotments to non-resident investors.
Rights Issues and Preferential Allotment are important methods of raising capital for Indian companies. When there is the involvement of non-resident shareholders or foreign investments, companies must adhere to FEMA regulations related to pricing, reporting, and compliance with sectoral caps. Seeking professional advice and ensuring compliance with FEMA guidelines will facilitate a smooth and legally compliant capital-raising process. Contact FilingsFirst