The government clarified on Tuesday that Indian companies operating in sectors where foreign direct investment (FDI) is restricted may issue bonus shares to existing foreign shareholders as long as the overall shareholding pattern remains unchanged.

Such issuances must rigorously abide by all relevant laws and regulations, the Department for Promotion of Industry and Internal Trade (DPIIT) stressed. In a statement, the DPIIT stated that bonus share issuance must adhere to all relevant laws, rules, regulations, and guidelines.

FDI Policy: Prohibited Sectors

This clarification is now an official part of the FDI policy. This move allows companies in prohibited industries such as lottery, gambling, chit funds, and tobacco product manufacturing to issue bonus shares to non-resident shareholders.

However, the key condition is that no new foreign investment be made, and the shareholding percentages of both foreign and Indian investors must remain constant.

"An Indian company engaged in a sector or activity where FDI is prohibited may issue bonus shares to its pre-existing non-resident shareholders, provided the non-resident shareholder's shareholding pattern remains unchanged after the issuance of bonus shares," the DPIIT clarified.

"This clarification pertains to the permissibility of issuing bonus shares to existing foreign shareholders by Indian companies operating in sectors where FDI is prohibited," according to the statement. Most sectors in India allow FDI through the automatic route, which requires investors to notify the Reserve Bank of India (RBI) after making an investment.

Government Approval Route

A foreign investor using the government approval route must first get approval from the relevant department or ministry. Prior government approval is necessary for some industries, including media, insurance, pharmaceuticals, and telecommunications.

Certain delicate industries, like the ones mentioned above, prohibit foreign investment. FDI is thought to be essential to India's economic expansion, especially in the area of infrastructure development. It is also crucial for maintaining the value of the Indian rupee and managing the nation's balance of payments.