(First published in The Hindu Business Line: https://www.thehindubusinessline.com/markets/listed-firms-attempt-to-convert-liability-to-foreign-parent-into-equity-hits-wall/article69230492.ece)
My take, as quoted in The Hindu Business Line, on the SEBI’s recent informal guidance on issuance of equity shares at a premium and its wider ramifications under FEMA and Tax:
“Under the Companies Act, SEBI ICDR Regulations, and FEMA NDI Rules, issuance of shares to a non-resident on a preferential basis above the floor price is permissible, according to Binoy Parikh, Executive Director, Katalyst Advisors. However, in this case, the issuance of a single share at a significant premium effectively amounts to a write-back of liability without being classified as such.
A few key concerns could have arisen had SEBI approved the transaction. First, under FEMA, prior RBI approval may be required, as export advance refunds are permitted only under specific conditions, while conversion into equity is not an automatic route.
Second, from a tax perspective, the absence of commercial substance in issuing shares at such a premium could lead to the transaction being treated as a taxable write-back in the Indian company’s hands. Lastly, given the associated party nature of the transaction, justifying arm’s-length pricing under transfer pricing regulations could be a significant challenge.”